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Bonus cap: more staff to be within scope

Wed, 22 May 2013 14:52:00 +0100

On 16 April 2013, as previously reported, the European Parliament adopted CRD4 – the fourth amendment to the Capital Requirements Directive (“Directive”). CRD4 includes a cap on bankers’ bonuses of 1 x salary. The cap can be increased to 2 x salary with appropriate shareholder approval, although at least 25% of any bonus in excess of 1 x salary must be deferred for at least five years.

The cap will apply to certain categories of staff of banks, building societies and, subject to the principle of proportionality, investment firms within the scope of the Directive. EU based firms will be required to apply the cap globally and non-EU based firms will be required to apply the cap to their EU sub-group.

The categories of staff subject to the Directive are defined under Article 88 as including “senior management, risk takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on risk profile”.

Under the UK’s Remuneration Code, these categories of staff are referred to as “Code Staff”. The Financial Conduct Authority (“FCA”) (formerly the Financial Services Authority) takes the view that (other than an individual who is a senior manager or an individual who holds a significant influence function) an individual is only Code Staff if he or she could have a material impact on his or her firm’s risk profile.

Concerns over the different approaches used by national regulators within the EU to identify the categories of staff subject to the Directive have led the European Banking Authority (“EBA”) to review the criteria used to identify such staff. On 21 May, the EBA published draft Regulatory Technical Standards under which it proposed that an individual will be a material risk taker if he or she satisfies one or more of the following criteria:

Qualitative criteria relating to the role and decision making power of the staff member e.g. a member of the firm’s management body or senior management
Internal criteria developed by each firm to identify material risk-takers based on the firm’s specific risk profile, or
Quantitative criteria based on the individual’s remuneration. These criteria will apply if: the individual’s annual total remuneration exceeds EUR 500,000; the individual is amongst the top 0.3% highest earners at the firm; or the individual’s variable remuneration exceeds EUR 75,000 and 75% of his or her fixed remuneration

The proposal includes a facility for firms to demonstrate that a particular staff member who is only caught under the quantitative criteria is not in fact a material risk taker. Applying this facility in practice is unlikely to be straightforward. The firm must take into account the amount of variable remuneration that could be awarded to the individual, his or her authorities and duties and the differences between the levels of remuneration which can be awarded in the different jurisdictions in which the firm undertakes business.

The EBA’s proposal is subject to consultation but, if it is implemented (and given the current political climate in the EU there is a good chance that it will be), it would introduce a completely different approach to identifying material risk takers. The presumption would be that an individual who met any of the remuneration criteria would be a material risk taker and it would be for the firm, subject to additional assessment and documentation requirements, to prove otherwise. Such an approach is likely to increase substantially the numbers of Code Staff and in turn the number of individuals to whom the bonus cap would apply.

This is another potential blow to the financial services industry and one which will make some possible solutions to minimise the impact of the bonus cap, such as increasing base salary, extremely costly to implement.

Penalty miss proves costly for Blackburn Rovers

Tue, 21 May 2013 13:04:00 +0100

Last week, the High Court published its full judgment in the latest of a series of recent cases on how the penalty doctrine operates in the employment law sphere - Henning Berg v Blackburn Rovers FC.

Under the doctrine, a contractual term will be a penalty if it requires the payment of a sum upon a party’s breach of the contract and:

the sum is not a genuine pre-estimate of the other party’s loss arising from the breach, or
the predominant function of the term is to act as a deterrent to breaching the contract (rather than to compensate for the breach)

If the term is a penalty, it will be unenforceable beyond the sum that represents the actual loss of the “innocent” party. In other words, the innocent party will only be entitled to damages for breach of contract under normal contractual principles (and will be required to mitigate its loss).

The penalty doctrine has been cropping up increasingly in the employment context around issues such as adjustment and claw-back provisions in deferred compensation schemes, leave provisions and restrictive covenants in share schemes. In addition, it was recently considered in connection with conditional good leaver provisions in compromise agreements in the BlueBay case (see our previous Journal article).

In the Blackburn Rovers case, the penalty issue arose in relation to a liquidated damages clause when the football club sought to withdraw its earlier admission of a claim for £2.25 million brought by its former manager, Henning Berg.

Under Mr Berg’s service agreement, he was employed for a fixed three-year period, but the club terminated the contract after just six months without paying him anything in compensation. There was a contractual provision in the service agreement giving Blackburn Rovers the express right to terminate early, provided that it paid Mr Berg a sum equal to his gross basic salary for the unexpired balance of the fixed period. Blackburn Rovers later sought to argue (among other things) that this contractual provision was an unenforceable penalty.

The High Court disagreed. It referred to the established principle that a sum of money will not be a penalty if it is payable under a contract on the occurrence of an event other than a breach of a contractual duty owed by the paying to the receiving party. The Court held that termination of Mr Berg’s employment prior to the expiry of the fixed term was not a breach of contract: it was permitted as of right and triggered the payment of a sum of money to Mr Berg. The clause in question was not a penalty, or a disguised penalty.

When drafting an early termination provision, employers should ask themselves at the outset what they are trying to achieve. A clearly drafted clause providing for payment on early termination will be enforceable, since the penalty doctrine does not apply in circumstances where the trigger for payment was not a breach of contract.

Of course, the penalty doctrine applies equally in the converse situation of an employer seeking to recoup sums from an employee after the employment relationship ends. Accordingly, employers should be mindful of the risk of inadvertently falling foul of the penalty doctrine when drafting clauses that deal with the event of an employee’s breach of contract. In particular, they should be careful when:

specifying the payment of a sum of money
providing for the repayment of a sum previously paid
providing for the surrender of an accrued or vested interest (but not one that is contingent), and/or
allowing the withholding of a sum which, but for the breach, would have been payable

Caste discrimination is cast into the limelight

Fri, 03 May 2013 11:32:00 +0100

The debate about the existence of caste discrimination in the UK and the extent to which individuals should be protected from it has been ongoing for many years. Back in 2008, when Parliament was in the process of consolidating existing discrimination laws into the Equality Act 2010, it had the opportunity to introduce specific protection against caste discrimination. In the end, it stopped short of doing so.

At the time there were too many questions and not enough time to resolve them whilst the legislation was being rushed through Parliament. Should caste be a protected characteristic in its own right, or should it be a specific sub-set of religion or race? Or was caste discrimination already protected as a form of race discrimination? That was certainly the Equality and Human Rights Commission’s view at the time, although the position was unclear.

This debate was brought back into the limelight again recently in the latest tussle between the House of Lords and the House of Commons on the passage of the Enterprise and Regulatory Reform Bill through Parliament. When the House of Lords put forward legislation against caste discrimination it was quickly rejected by the Government. However, after the House of Lords continued to frustrate the Government by rejecting its employee shareholder plans, the Government finally committed to making regulations outlawing caste discrimination as an aspect of race discrimination to try and sweeten the deal.

Consultation on the issue (and extent) of caste discrimination is expected. However, the Government has indicated that legislation will come into force within 1 to 2 years. As a result, by April 2015 any discrimination because of caste will be a form of race discrimination, and therefore unlawful. There will be a review of the legislation in 5 years’ time so the protection can be repealed if it is shown not to remain necessary. One of the reasons for the inclusion of this “sunset clause” is that the diverse nature of the concept of caste is not currently well understood in the UK.

Class v caste

Often, caste is thought of as being synonymous with class (see our recent Journal post for more on class or “socio-economic” discrimination). Indeed, in colonial times, it was said that “class and caste stand to each other in the relation of family to species; the general classification is by class, the detailed one by castes”.

Yet this statement also reveals a crucial difference. The caste system is a precise, rigid one. It is not possible to move from a lower caste to a higher one. It is a well-defined, identifiable characteristic and the caste an individual is born into stays the same for life. In this respect caste, when considered as a protected characteristic, has much in common with characteristics which are already protected in terms of permanence and ease of identification.

Many commentators criticise the lack of social mobility in this country. But whilst it may be difficult to move from a poor working class background to one of the über wealthy cultural elite, it is not impossible. The class system we are all familiar with in the UK is nowhere near as rigid or well developed as the caste system. These differences mean that it will (finally) be possible to legislate against caste discrimination, whilst socio-economic or class discrimination remains out in the cold.

Alterations to commercial premises: are you at risk?

Thu, 02 May 2013 15:13:00 +0100

Commercial tenants often need to carry out fit-out or other works to premises, but despite the restrictions in many commercial leases, the legal paperwork is sometimes ignored. This is a mistake. Getting the paperwork wrong, or ignoring it altogether, can hand a weapon to the landlord and could lead to protracted and expensive disputes down the line, sometimes involving extra remedial works, “unfair” rental uplifts, damages and - in drastic cases - forfeiture of the lease itself.

Typically, a commercial lease will contain restrictions as to what can and can’t be done to the premises, and in most cases a tenant is likely to require the landlord’s consent before carrying out anything other than very minor works. Consent is likely to be given in the form of a “licence to alter”, so in addition to the practical considerations of choosing a fit-out contractor and design team, tenants also need to pay close attention to their pre and post-works obligations in the licence itself. These licences are not just a tick in the box – they usually contain important obligations on the tenant, and need to be carefully considered.

Most licences to alter will contain a number of provisions that need to be complied with before the works begin. For many works, this will include the appointment of a “CDM co-ordinator” under the Construction (Design and Management) Regulations should ensure that the works comply with the various requirements in the Regulations. Tenants risk committing a criminal offence if they allow works which are subject to the Regulations to proceed without addressing this issue, so it needs to be given serious attention. Another pre-work requirement is likely to be the approval of the insurers of the premises.

During the works, there will usually be an ongoing obligation to keep the landlord informed of progress and to allow site inspections. Usually, the tenant will be under a contractual obligation to procure that the works are carried out with due care and attention and in compliance with other requirements, so it’s important to make sure that all such obligations are passed down to the contractor or other appropriate consultant.

Other essential considerations include insurance of the works (they are not automatically put on either the contractor’s or the landlord’s policy), and making sure all necessary consents are obtained.

Once the works are done, a tenant’s obligations don’t stop. Normally, a set of as-built plans should be provided to the landlord and the health and safety file under the Regulations (duly updated to reflect the altered state of the premises) may need to be handed over to the landlord. If you have a rent review looming after works are carried out, you should show a copy of the licence to alter to your surveyor – a well-drafted licence may contain a clause which could help to minimise any rental uplift in future, by disregarding tenant-funded improvements to the premises at future rent review dates.

The overall message is to make sure your alterations are properly documented and don’t give your landlord an avoidable excuse to squeeze you.

Rights to Light: relaxing the rules

Thu, 02 May 2013 15:09:00 +0100

The Law Commission (with a standing brief from the government to review areas of the law felt to be unsatisfactory) is currently inviting views on proposed changes to rights to light, which have been identified as causing “a disproportionately negative impact upon the potential for the development of land”.

One of the key triggers for the consultation was the recent (and controversial) decision HKRUK II (CHC) Ltd v Heaney [2010], in which the High Court granted an injunction requiring the partial demolition of a newly constructed building which obstructed a neighbour’s right to light, when many observers thought that an award of damages, instead of an injunction, would be adequate. Developers argue that Heaney has made it particularly difficult to plan new projects in built-up areas, and that the law requires urgent clarification.

The consultation therefore has three key objectives:

To introduce greater certainty and transparency into rights to light, and to make disputes simpler and cheaper to resolve;
To ensure that rights to light do not (as is perceived since Heaney) act as a constraint on development; and
To recognise that – whilst reform might be needed – rights to light are an important property right, and should continue to be protected.

To achieve these objectives, the consultation contains four main provisional proposals:

It should no longer be possible to acquire rights to light by long established historic enjoyment (often called “prescription”);
A new statutory test should be introduced to clarify when damages (rather than an injunction) should be granted by the court;
A new statutory notice procedure, requiring those prospectively injured by a development to engage with the developer in order to preserve the right to injunct, failing which only damages will be available; and
The introduction of a mechanism for the court to discharge or modify existing rights to light in certain circumstances.

Some observers (and certain newspapers in particular) urge caution: rights to light might be inconvenient from time to time, but they are a long-established and important property right. To dilute these rights risks unfairly favouring the interests of developers over property owners. But change is likely. The government believes that the health of the construction sector is crucial for wider economic recovery and given the particular uncertainties surrounding rights to light, the call for some level of relaxation is likely to prove very tempting.

The consultation period ends on 16 May 2013, and the Law Commission paper can be read here.

Landlords in distress - an overview of the new regime for recovery of commercial rent arrears

Thu, 02 May 2013 14:30:00 +0100

The law of distress is a ‘self help’ remedy which permits a commercial landlord to seize, remove and sell a tenant’s goods if it is in arrears of rent. It has been governed by legislation starting with the Distress for Rent Act 1689, but is seen by many as a draconian remedy which gives landlords preferential treatment over other unsecured creditors.

The process is now set to be replaced – probably later this year, by a new system called Commercial Rent Arrears Recovery (CRAR) enacted by the Tribunals, Courts and Enforcement Act 2007. CRAR is set to be introduced alongside new rules reforming the bailiff industry and, in particular, the introduction of mandatory training and certification and a restriction on enforcement agents’ ability to use reasonable force when entering a property.

The changes under the new system are designed to improve compliance with human rights legislation and will impose more checks to safeguard a tenant’s interests.

Many landlords have however voiced serious concerns about the new procedures which, when they come into force, will give tenants advance warning about a landlord’s intention to exercise the remedy and will therefore give the tenant an opportunity to remove goods from the premises. The result might be that landlords will not feel comfortable with the new procedures as a remedy to recover rent arrears and will insist on greater rent deposits or personal guarantees on the grant or transfer of leases.

The critical changes under CRAR are:

A landlord can only recover rent arrears above a minimum level (yet to be confirmed);
A landlord will only be able to recover in respect of unpaid rent payable for use of the premises (with any applicable VAT and interest) and so does not include additional amounts due under the lease e.g. rates, service charge, insurance etc., even where these items are reserved as additional rent in the lease;
A landlord will now have to give a minimum of seven days’ notice to the tenant;
Once notified by the landlord, the tenant can apply to the Court to set the notice aside; and
The landlord cannot seize goods unless they use a certified enforcement agent.

New air conditioning regulations: your business might be affected!

Thu, 02 May 2013 14:23:00 +0100

As unglamorous as it sounds, the colourless cooling gas "R22" (an ozone-depleting CFC propellant) is likely to become a hot topic for commercial landlords and tenants over the next year or two, thanks to tough EU regulations that will soon come into full force.

Despite previous government efforts to reduce the use of R22, it still powers a lot of older office chiller and air conditioning units. From 1 January 2015, it will become illegal to use any form of R22 to service or maintain any cooling system, so in due course, R22-guzzling systems will be unusable (legally!) and will either need to be converted to "cleaner" forms of propellant or (if conversion is not practical) need to be replaced entirely.

Inevitably, this will have financial and practical consequences for commercial landlords and tenants, as well as for business owner-occupiers. For example, there may be issues between landlords and tenants about which of them (although the lease may be silent), is responsible under the lease to carry out necessary work, what that work should be, and who should pay for it. Any review of the annual rent due under the lease may also be affected.

The obligation may fall on a tenant directly - in which case, the tenant is likely to be solely responsible for ensuring that the air conditioning units comply with the new R22 regulations. Some landlords might be concerned about the tenant’s competence to do or manage the work properly – if so, open dialogue and the offer of practical assistance would be sensible. In other cases, where a landlord is bound to repair plant under the lease, it may be required to carry out the work itself, but will usually seek to recover the costs of doing so via the service charge (if the service charge envisages this sort of expense). In short, regardless of who carries out the work, someone will have to pay: and in many cases, it will be the tenant.

It is therefore a good idea to familiarise yourself with your potential liabilities now – so check the obligations in your lease and start preparing accordingly. And if you, as a tenant, are currently in the process of renewing a lease or taking another lease of entirely new commercial premises, it is a good idea to check the position on R22 at the outset. Agreeing a clear maintenance or replacement programme (with clear divisions of liability for costs) could save hassle, if not always expense, later on.

Government to consider tax changes for LLP Members

Tue, 30 Apr 2013 16:36:00 +0100

It will not have escaped anyone’s attention that, in this difficult economic climate, the Government is making a concerted effort to close down tax avoidance schemes and pursue those that improperly seek to evade their proper tax liabilities. However, what may not be as widely appreciated is that the Government’s efforts could have a significant impact on a huge number of limited liability partnerships; the Chancellor of the Exchequer announced in his March budget that a Government consultation is to be undertaken which will focus specifically on limited liability partnerships and the way that members are treated for tax purposes.

Back in December 2012 the Government said that HMRC would consider the tax rules applicable to partnerships because partnerships were being misused by the unscrupulous in tax avoidance schemes. Continuing that theme, George Osborne announced last month that:

the Government will consult on measures to remove the presumption of self-employment for limited liability partnership members, to tackle the disguising of employment relationships through LLPs; and
counter the artificial allocation of profits to partners (in both LLPs and other partnerships) to achieve a tax advantage.

The removal of the presumption that members of LLPs are self-employed and should be taxed as such could have significant financial consequences for businesses operated using the LLP model; an obligation to pay employer’s national insurance could result in substantial increases in tax liabilities.

It is not yet clear how LLPs would go about satisfying HMRC that individuals were properly to be treated as having self-employed status and should be taxed as such but, it is reasonable to expect that large numbers of LLPs should review their Members Agreements to check that the rights, obligations and responsibilities of individual members are consistent with those individuals being self-employed rather than employees.

It may also be prudent to anticipate that if the true status of individuals is to be scrutinised for the purpose of establishing tax status, that scrutiny might be used in the context of other rights and obligations as between an individual and the LLP. If scrutiny suggests to HMRC that an individual is an employee for tax purposes, might that individual use that same analysis to argue that they are properly to be treated as employees for all purposes and therefore entitled to the rights of an employee in relation to unfair dismissal etc?

Although changes to the tax rules will not come into force until 2015, LLPs, and particularly their management committees and managing partners, should keep a close eye on the Government consultation and start work on reviewing their Members Agreements sooner rather than later.

Bankers’ bonuses: is the cap contrary to EU law?

Tue, 30 Apr 2013 15:36:00 +0100

The EU Parliament recently adopted the legislative package known as CRD4 which, as previously reported, includes a basic cap on bankers’ bonuses of 1 x salary. The cap can be increased to a maximum of 2 x salary with appropriate shareholder approval, although a minimum of 25% of any bonus exceeding 1 x salary must be deferred for at least five years.

The text of CRD4 remains subject to a detailed review of legal drafting, translation into other official EU languages and formal adoption by ministers. Assuming the legal translation can be completed in time for the legislation to be published in the EU Official Journal before 1 July 2013, the cap will apply to remuneration awarded for services and performance on or after 1 January 2014. If the legislation is published on or after 1 July 2013, the cap is only likely to apply to remuneration awarded for services and performance on or after 1 July 2014.

Or will it?

A group of banks is considering challenging the legality of the cap. One of its primary arguments is that pay (other than equal pay) is specifically excluded from matters on which the EU may legislate in the field of social policy under Article 153 of the Lisbon Treaty.

A decision of the Central Arbitration Committee (CAC) last week – the first UK case to consider this issue of which we are aware – has confirmed that, at least in the opinion of one domestic body, the EU has no competence to legislate on pay.

The matter before the CAC was a complaint by a European Works Council (EWC) that the British Council had failed in its obligations under the Transnational Information and Consultation of Employees Regulations 1999. The EWC claimed that the Council had failed to inform and consult with the EWC on its policy and pilot for an employee performance related pay (PRP) scheme that it was proposing to introduce.

The EWC acknowledged that pay and pay-related issues were not expressly referred to in the 1999 Regulations or in the EU Directive that established the remit of the EWC. However, it argued that the sole issue was whether the PRP scheme was a “transnational” matter as defined in the Regulations. If it was, the British Council was obliged to provide information to, and consult with, the EWC on the scheme.

In rejecting the complaint and finding that the PRP scheme was not a transnational matter, the CAC decided that the EU and bodies such as EWCs that are established as a result of EU legislation have no competence to deal with pay or with matters that directly fall into the category of pay-related issues. This was because of the exclusion under Article 153 of the Lisbon Treaty and explained why the Regulations did not expressly refer to pay or pay-related issues.

Although not binding on any higher courts, let alone the European Court of Justice, this ruling will give at least some comfort to the banks challenging the cap - although they will still need to show that the cap itself amounts to pay regulation. The European Commission and European Parliament have dismissed claims of illegality on the basis that the cap does not constitute social policy: it does not limit the amount an individual can be paid, but merely sets a ratio of salary to bonus in an attempt to reduce risk taking.

The question of whether the EU does have the power to impose the cap is an interesting one, with implications not only in relation to banking bonuses, but potentially in other areas such as whether the EU could intervene in setting rules around minimum wages. We will be following developments closely.

Bankers' multimillion bonus claim upheld

Mon, 29 Apr 2013 16:17:00 +0100

The Court of Appeal has upheld a High Court award of more than EUR 50 million in bonuses to a group of 104 bankers. In so doing, it gave some important guidance on the circumstances in which promises made during the course of employment will acquire contractual effect.

The facts of the case are set in our report of the High Court’s judgment. In short, Dresdner Kleinwort announced to investment banking employees the creation of a guaranteed minimum EUR 400 million bonus pool, in order to stem departures during the 2008 banking crisis and against a backdrop of rumours of collapse and takeovers. This was communicated at “town hall meetings” and confirmed in subsequent intranet postings.

Following Dresdner’s takeover by Commerzbank, in the context of public anger at prospective payments of bonuses to employees of an institution bailed out by the German taxpayer, Commerzbank sought to reduce the bonus pool by 90%, arguing that the communications over pool size had not had contractual effect.

The Court of Appeal’s decision is largely a ringing endorsement of the conclusions the High Court reached. Of perhaps greater significance are the Court’s findings on some very basic points of contract law which can nonetheless give rise to disputes in practice.

Was the promise too uncertain?

The bank argued that the announcement of the bonus pool left too much uncertainty for it to amount to a contractual promise. There was, for example, uncertainty over: whether the individual guaranteed fixed bonuses should come out of the fund; whether the bonus should be paid by way of shares or cash; and what proportion of the fund could be held back for contingencies, it being accepted that an element of the fund could be dealt with in that way.

The Court of Appeal held that these problems were largely dealt with by the High Court’s finding that the fund would be dealt with “in the usual way”, meaning that confirmed individual fixed bonuses would be paid from the fund as well as the discretionary bonuses. While there would be some imprecision, for example on the question of how much could be withheld for contingencies, the Court felt there was no doubt that the parties would recognise that it would be a reasonable figure of the kind typically withheld for this purpose in the past. The fundamental principles of the scheme were clear, and the fact that there were some loose ends did not come close to creating the degree of uncertainty necessary to defeat the parties’ intention that the agreement should be capable of enforcement.

Was there offer and acceptance?

The bank argued that, if its announcement of the creation of a bonus pool of a particular size was an offer, no binding contract in relation to it had come into effect because there was no acceptance by the employees.

The Court disagreed, finding that it was plain that the bank had dispensed with the need for any response to the offer at all. It was a promise without any disadvantage, actual or potential, to the employees and nobody hearing the promise made in the announcement would expect an employee to be able to benefit from it only if he or she positively accepted it. The Court described this as a “wholly formal and unnecessary exercise”, holding that “the only sensible implication is that all employees who might potentially benefit from the promise would be deemed to have accepted it”.

The Court went on to say that the nature of the promise was inconsistent with the notion of individual acceptance. It would mean that if, say, a minority of the relevant staff accepted the offer, the employer would be bound to pay the whole of the bonus pool, if only to the minority. It was unrealistic to think that the bank would be willing to pay its bonuses from the fund by reference to whether the particular employee had formally accepted the offer or not. If acceptance was needed, the minority who accepted the offer would at least arguably have a contractual claim against the bank if it sought to diminish the fund by applying it for the benefit of those staff who had not accepted the offer and therefore had no claim on the fund. This was described as a “bizarre result”.

Was there consideration?

In response to the bank’s contentions that the employees benefiting from the promise had not given anything in exchange (consideration), the Court found this was wrong as a matter of fact. Each claimant had given good consideration in that the bonus pool was at least a factor, to a greater or lesser extent, in their decision to remain with the bank.

Was there an intention to create legal relations?

Finally, the bank argued that it had not intended to create legal relations when it announced the setting aside of a minimum bonus pool of EUR 400 million. It appealed on the basis that the High Court had been wrong to conclude that the burden of proof was on the bank to show that there was no intention to create legal relations, arguing that this should not be the case where – as here – the contractual promise was unilateral in nature.

The Court of Appeal disagreed and indeed went further. It stated that where a term was being introduced into a pre-existing contractual relationship – i.e., the employment relationship – there would be a very strong presumption that it was intended to be legally binding. There would be an onus on the party asserting that there was no intention to create legal relations to establish that fact.

Implications

Employers in all industries should take particular note of these findings by Court of Appeal:

there will, in cases of this type, be no need for an employee to accept positively an offer made to them for a contractual promise to come into effect;
an employee’s decision to remain with their employer in response to a promise made will amount to good consideration; and
where terms are introduced into an existing employment relationship there will be a strong presumption that they are intended to be binding.

More broadly, the judgment reinforces the need for management to proceed with utmost care when communicating promises related to pay and benefits to employees if they do not intend the promises to have contractual force. This applies even if the communication is made to a group and is not specific at the individual level.

Employee shareholders - back in play!

Fri, 26 Apr 2013 14:18:00 +0100

After an intense game of parliamentary ping-pong, the House of Lords has finally agreed to spare George Osborne’s blushes and accept the Government’s proposed revisions to clause 27 of the Growth and Infrastructure Bill, meaning that the “employee shareholder” legislation will become law at some point this Autumn.

We reported back in December that most respondents to the Government’s consultation indicated that they did not think that the take up would be high amongst employers. The responses also highlighted a number of technical problems with the legislation which needed to be ironed out, before the legislation could be enacted. At least some of these technical questions appear to have been answered (see the “concessions” below), but it is still widely felt that take up by employers will be very low. As such, although George Osborne may have saved face politically the reform may have very little impact in the real world.

By way of a reminder, “employee shareholders” is the Government’s proposal to introduce a new type of employment contract. Under these contracts, employees will give up employment rights such as unfair dismissal and statutory redundancy pay and, in return, receive between £2,000 and £50,000 of shares in their employer. These shares will be exempt from capital gains tax.

Since the original draft legislation was circulated at the end of last year, the main headline concessions which the Government has made to the proposed legislation are:

Individuals being offered employee shareholder status must be given a written statement containing full details about the shares and the rights they carry as well as the employment rights being given up
Individuals will need to have received advice from a relevant independent adviser (as with compromise agreements) before they can become employee shareholders. There will be a 7 day ‘cooling off’ period for them to consider this advice during which they can change their mind even if they have already signed an agreement
Unlike compromise agreements, employers will be legally required to pay the “reasonable costs” for this advice and will have to pay regardless of whether the individual accepts the employee shareholder agreement
The first £2,000 of shares will not attract income tax, and
Employees will be considered to be automatically unfairly dismissed if the reason for the dismissal relates to the fact that the employer is trying to force them to convert to employee shareholder status. Employees will also be protected from other detriments (falling short of dismissal) if they refuse to switch

It is interesting that employers will be required to make a financial contribution towards an employee getting advice on the employment rights being given up. Whilst we do not expect that something comparable will be brought into the compromise agreement legislation, it may be something which is monitored by the Government. It will also be interesting to see whether the market rate as to what constitutes a “reasonable” sum in respect of this advice will be around the same level as for a basic compromise agreement. We expect that it will be higher, because of the need to give advice on the employment law rights being given up as well as taxation issues and share rights. Also, because of the way that the legislation is worded, it is likely that non-lawyer “relevant independent advisers” – such as unions - may start to charge a fee for the advice that they give.

Another case on the rights of limited partners

Thu, 25 Apr 2013 11:36:00 +0100

There has been a further case which has looked at the rights of partners of limited partnerships. Whilst this case does not create ground breaking law, it does clarify and help us to understand certain matters relating to the rights of limited partners. In the case of Certain Limited Partners in Henderson PFI Secondary Fund II LLP (firm) v Henderson PFI Secondary Fund II LP (a firm) and others, the High Court held that limited partners in a limited partnership had the right to pursue a derivative action against the third party investment manager who had been delegated the task of investment management by the general partner of the limited partnership.

As analysed in our November 2012 article, a limited partnership is governed by the Limited Partnerships Act 1907 and the Partnership Act 1890. It has a general partner responsible for the management of the firm, who is liable for its debts and obligations. The limited partners, usually the investors, will have the benefit of limited liability provided they do not get involved with the management of the firm. The fund manager of an investment fund, for instance, will be the general partner but will usually, as was the case here, delegate such management responsibilities to a third party with limited liability (the Manager).

In this case, problems arose when some of the funds raised were used by the Manager to invest in assets which breached the fund’s underlying investment criteria. As is common with these structures, the Manager was part of the same corporate group as the limited partnership’s general partner and, consequently, the limited partners did not trust the general partner to raise any of their concerns or bring a claim against the Manager for breach of its obligations under the corresponding investment management agreement. The limited partners therefore took charge and applied to the court for the right to bring a derivative action against the Manager and the general partner in the name of the limited partnership.

Derivative claims are normally associated with companies and are brought by shareholders in the name of the company, typically against the company's current or former directors. However, derivative claims can arise in other circumstances, such as in the context of partnerships, where the justice of the case demands it. In this case, the investors claimed that given the conflict between the general partner and the Manager, such special circumstances arose. The court agreed that the investors could bring a derivative action against the Manager, but to do so they would need to forfeit their limited liability for the period during which such claim was being pursued. The court added that the investors were not entitled to pursue a derivative claim against the general partner as any such claim could be brought under the limited partnership agreement. Presumably also, although not specifically mentioned, the investors could, in theory, bring a claim for breach of duty of good faith against the general partner.

The case is helpful because it confirms that the expression of a view about the limited partnership’s performance, strategy or future direction does not constitute involvement in management. Furthermore, it supports the views set out in the case of Inversiones Frieira of last year that the inspection of partnership books and the examination of the state and prospects of limited partnership business do not constitute management.

When delegating their management responsibilities, therefore, general partners should be aware of the potential risks of direct action being taken by limited partners and should take care when choosing a suitable investment manager. However, it remains to be seen whether loss of limited liability is a price that limited partners are happy to pay in order to take direct action against such investment managers.

Buy back hurdles reducing to encourage employee ownership

Thu, 25 Apr 2013 10:49:00 +0100

In order to encourage more employee owned businesses, which evidence suggests are more resilient in tough economic times, the Government is proposing changes to the company law share buy back rules. These changes are intended to remove or reduce some of the barriers and disincentives to companies in allowing their employees to have direct share ownership.

These “deregulatory” changes, which relate to the authorisation and financing of share buy backs and the holding of repurchased shares “in treasury”, are due to come into force on Tuesday 30 April 2013.

For private companies, the changes are as follows:

The shareholders will be able to authorise a buy back by ordinary resolution (requiring a simple majority) rather than a special resolution (requiring 75% or more of the votes).
There will be no need for a company to find enough distributable reserves to pay for the shares, if they are paid for with a “small” amount of cash and the company’s articles authorise it.
That “small” amount must not exceed the lower of £15,000 or 5% of the company’s share capital in any financial year.
This will help companies to make small payments when they have no distributable reserves.
Shares bought back out of distributable profits or “small” amounts of cash as described above (but not otherwise out of capital) could be held in treasury and not cancelled.

The following additional relaxations would apply if the purchase is for the purposes of or pursuant to an employee share scheme:

multiple share buy backs could be authorised in advance by a single ordinary resolution (specifying the maximum number of shares, the maximum and minimum prices per share and its expiry date five years later or before);
the shares could be paid for in instalments (and not just on purchase); and
the required procedures for payment out of capital will be reduced to shareholder approval by special resolution supported by a solvency statement signed by all the company’s directors.
Non employee share scheme buy backs out of capital would still need to follow the more onerous existing procedures involving an auditors’ report, in addition to a directors’ statement and special resolution.

Simplification?

Companies will welcome these proposals as they will remove some, but not all, of the challenges with share buy backs, especially when buying back shares from departing employees and for small amounts of cash.

However, by making only some of these changes applicable to employee share schemes, the Government is not simplifying the buy back rules overall, but is introducing an extra layer of complexity. We cannot see any reason why these changes cannot be available to all types of private company share buy backs.

It is interesting that these changes are being made in advance of the new “employee shareholder” regime, due to be introduced this autumn. That’s the new type of employment contract under which, in exchange for giving up some of their employment rights, employees can opt to receive CGT free shares in their employer.

You can read our most recent report on the progress of the “employee shareholder” legislation here.

You can also read the draft regulations implementing these buy back changes on the Government's website here.

You can read the Government’s response to its consultation on these buy back changes here.

Agreeing to agree: not always a cop out

Thu, 25 Apr 2013 10:44:00 +0100

In the recent case of MRI Trading AG v Erdenet Mining Corp LLC [2013] EWCA Civ 156 , the Court of Appeal held that an agreement to agree was enforceable when the terms of the contract were sufficiently certain, part of the contract had been performed and there were clear intentions to create a binding contract.

Background

Agreements to agree are traditionally unenforceable in contract law because they lack certainty. However, the courts have been willing in the past to enforce contracts which leave certain issues to be agreed at future dates.

Facts of this case

In 2009, two parties entered into a settlement agreement following a dispute over a contract for the supply of copper concentrates (the Settlement Agreement). The Settlement Agreement included the terms of a new contract for the supply of copper concentrate in 2010 (the 2010 Contract). This was set out in a schedule to the Settlement Agreement. Erdent Mining Corporation LLC (EMC) refused to supply the copper on the basis that certain terms of the 2010 Contract were left to be agreed in 2010 and the 2010 Contract was consequently an unenforceable agreement to agree. The Settlement Agreement also contained an arbitration clause.

The arbitration tribunal agreed with EMC that the contract was unenforceable. The High Court (to which MRI Trading had appealed on this point of law) disagreed with the arbitration tribunal and set the award aside. EMC appealed to the Court of Appeal.

(The circumstances in which a party can appeal an arbitrator’s decision are limited, but, unless the parties have agreed otherwise, a party may appeal to the court on a question of law arising out of the arbitration award.)

Court of Appeal ruling

The Court of Appeal agreed with the High Court and held that:

the Settlement Agreement and the other commercial contracts entered into at the same time as the 2010 Contract should be taken into account when interpreting the 2010 Contract; and
the 2010 Contract was legally binding.

The Court of Appeal noted in particular that the 2010 Contract was part of the Settlement Agreement and a wider range of commercial contracts. It was therefore “almost perverse” not to conclude that the parties intended to create a legally binding contract. Crucially, the 2010 Contract and the Settlement Agreement contained an arbitration clause. The Court of Appeal decided that this supported the notion that the 2010 Contract was sufficiently certain because there was a mechanism for disputes to be resolved in the event that the parties could not reach an agreement.

So I don’t need to agree everything up front?

This case may be contrasted with the earlier recent decision in Barbudev v Eurocom Cable Management Bulgaria Eood & Ors (you can read our earlier article on this case here).

In Barbudev, a side letter containing an agreement to agree was not enforceable due to lack of certainty; highlighting just how crucial this point is.

The MRI Trading case provides guidance as to when an agreement to agree would be enforceable. In a long term commercial contract it may be useful to have the flexibility of agreeing that certain aspects of a deal will be determined at a later date when more information might be available. However, any such clauses will need to be carefully crafted and considered to ensure that there is sufficient certainty. Ideally the language used in such a clause should be clear, precise and include a mechanism for resolving disputes if an agreement cannot be reached.

Cobbetts: high profile demise leaves unsecured creditors out in the cold

Wed, 24 Apr 2013 15:40:00 +0100

In recent years there have been a number of high profile law firms entering insolvency. February 2013 saw the demise of Cobbetts LLP as it entered administration. Established back in 1838, the firm had a long and proud history. At the point of its collapse it was a full service law firm, maintaining offices in Manchester, Leeds, Birmingham and London with over 400 staff and 73 members.

The business experienced a significant downturn in trading performance during 2009 stemming from a decline in property and corporate transactions. This, combined with expensive lease commitments (almost £74.4m owed according to the administrators’ report), created significant pressure and increased its reliance on short term borrowing. The SRA became heavily involved and by late November 2012, KPMG was instructed to prepare a detailed contingency plan. By around mid-January 2013 KPMG was instructed to assist management with a sale of the LLP’s business and assets. The LLP entered administration on 6 February 2013.

Immediately upon appointment the administrators sold the LLP’s business and assets to DWF as part of a pre-pack arrangement. Elements of the business did not follow over but on the whole the pre-pack sale succeeded in avoiding a break-up of the practice, reducing some of the potential difficulties in recovering outstanding debtors and WIP. It meant employees transferred across under TUPE Regulations (as a break up would have led to redundancy claims, further reducing sums available to unsecured creditors) and clients did not have to deal with the LLP whilst it was in administration. In this latter respect the pre-pack furthered the SRA’s aims. The SRA has been candid about its approach stating that its central focus with Cobbetts was the protection of client interests. This included client money, competent continuance of client business, effective client communication and resolution of any confidentiality and conflict of interest issues which might arise.

From the perspective of members, reports suggest that repayment of their capital loans is likely to be funded in large part by tax reliefs on losses with the balance being picked up by DWF (a nil balance appears in the Statement of Affairs prepared by the Administrators alongside the current members entry). This is in stark contrast to those former members who may have been waiting to get their capital out of the LLP - they will rank as unsecured creditors. Collectively, members who retired before May 2012 are estimated to be owed in excess of £0.6m.

It is the position of unsecured creditors which has caused real concern amongst commentators. Whilst the Administrators’ report to creditors anticipates that fixed and floating charge creditors will be repaid in full, the distribution to unsecured creditors will be paltry. According to the Statement of Affairs, unsecured debt stood at over £91.6m yet a dividend of less than 2p in the £ to unsecured creditors is on the cards.

There is no doubt that further insolvencies will follow in the legal sector. The legal market remains extremely tight. Meanwhile the UK economy is flat, having avoided a triple-dip recession by only a whisker. In the case of Cobbetts, banks and other third party lenders are reckoned to have been left with over £5m in unsecured debt. With each high profile collapse, the perception of law firms as a safe bet for banks (and indeed amongst creditors more widely) is declining. Lending criteria will tighten and, as we have said before, the likelihood of personal guarantees increases for those seeking to operate with limited liability.

IR35 extended from 6 April 2013

Wed, 24 Apr 2013 14:00:00 +0100

Workers often decide to supply services to clients through an intermediary (such as a personal service company) rather than contracting directly with the client. They may do this for a number of reasons. One is that a worker can make real tax savings by taking some profits in company dividends rather than salary. This is because, unlike salary, dividends are not subject to NIC. They are also subject to a lower effective income tax rate.

IR35 was introduced in April 2000 to counter false self-employment and particularly the practice of paying dividends through personal service companies (see our inbrief IR35: Here to Stay for more information). If IR35 applies, the fees that the intermediary receives from the client (subject to certain deductions) are treated as the worker’s employment income and the intermediary must deduct PAYE and NIC.

Prior to 6 April 2013, IR35 applied for income tax purposes where a worker personally performed services for a client via an intermediary and the worker would have been an employee of the client if those services had been provided directly to the client. Accordingly, for income tax purposes, IR35 did not apply to an office-holder unless he or she would have been the client’s employee if the intermediary did not exist. (However IR35 has always applied to both employees and office-holders for NIC purposes.)

With effect from 6 April 2013 the IR35 rules on income tax have been extended to apply where:

A worker personally performs services for a client via an intermediary and if those services were provided direct to the client the worker would be an office-holder of the client, and
A worker who is an office-holder of a client, personally performs services for that client which “relate to” his office.

An office is a position that exists independently of the person holding it and which may be filled by successive holders. HMRC guidance states that, for example, a factory manager or a division head are not office-holders, as these positions may be varied or terminated by the business; they do not have sufficient independent existence or permanence to be an office.

This extension will be of particular concern to workers who are supplying their services to the public sector through an intermediary, since many senior public sector positions are in fact offices. In the private sector, the extension will primarily affect those workers who are supplying their services as a non-executive director or as an acting director through an intermediary.

The meaning of the phrase “relates to” in the second test above is unclear and creates unwelcome uncertainty. Early indications from HMRC are that the test is aimed at the situation where the duties performed by the office-holder have been artificially divided – the test is intended to catch those services which should have been provided in the worker’s capacity as an office-holder rather than consulting services which could have been provided by a third party.

Workers supplying services to a client through an intermediary as an office-holder or supplying services which potentially relate to their holding of an office with a client should review their position. The review should look at not only the current situation but also any historic one to ensure that the intermediary has previously accounted for NIC on any fees it received.

European Court of Human Rights upholds UK ban on broadcast political ads: but is it time to lift the ban in any event?

Mon, 22 Apr 2013 17:04:00 +0100

Yesterday morning (Monday 22nd April), the European Court of Human Rights in Strasbourg ruled that the UK’s complete ban on both party political and cause-related ‘advocacy advertising’ on television and radio is compatible with the European Convention on Human Rights. The Court decided that although the ban does have an adverse impact on the Article 10 right to freedom of expression, it broadly accepted the UK government's argument (as previously upheld by the UK courts) that the ban is justified as being necessary to meet another important need of a democratic society, primarily to prevent public debate from becoming a contest about who has the deepest pockets to pay for broadcast advertising. The ban is enshrined in the Communications Act 2003 and is reflected in the Ofcom Code and the BCAP advertising Code and will therefore remain in place for the foreseeable future.

But while the Court has decided the ban is lawful, our question is this: Is it right?

The Court’s judgment could not have been a more close-run thing, the Grand Chamber judges ruling by nine votes to eight to uphold the ban. Factors counting in its favour included that the Westminster Parliament had debated the ban extensively when the Communications Act was enacted in 2003; that there are other avenues to pursue instead of advertising; and there is no consensus throughout Europe as to how to regulate political advertising, giving the UK a broader discretion to make its own decision on the subject. The ban is restricted to broadcast advertising, so political and cause-related advocacy advertising in non-broadcast media such as the press and online have always been permitted, subject to the normal requirements of the CAP Code regarding issues such as substantiation, taste and decency. That remains the position.

The application to the European Court of Human Rights was lodged by the animal welfare organisation Animal Defenders International (ADI) in September 2008, after its arguments against the ban on had been defeated in the House of Lords. The dispute first arose as long ago as 2005, when ADI had wanted to run a TV commercial as part of its "My Mate's a Primate" campaign, highlighting the alleged misuse of primates in zoos, circuses and TV advertising. The commercial juxtaposed images of a young girl and of a chimpanzee, both being enchained in cages; but the problem was with the purposes of ADI, rather than the content of the commercial itself. Ironically, although never shown on UK television, the commercial could be viewed on the ADI website in any event.

The Broadcast Advertising Clearance Centre (BACC), now known as Clearcast, refused to clear the commercial for broadcast because it infringed the relevant TV advertising code rules implementing the ban laid down in sections 319(2) and 321(2) of the Communications Act 2003, which prevent both broadcast commercials by organisations with political objects, and commercials directed towards a political end. Rule 4 of the BCAP (Broadcast Advertising) Code prohibits broadcast commercials by bodies whose objects are ‘wholly or mainly of a political nature’, or may be ‘directed towards any political end’, including influencing government policy or public opinion on matters of public controversy in the UK.

ADI's purposes were "political" for the purposes of the Act, as it wanted to change the law to protect primates from use in zoos, circuses and advertising. ADI sought initially judicial review of the BACC's decision through the British courts, and a declaration that the ban was incompatible with the Convention right to freedom of expression, but it was unsuccessful in both the High Court and the House of Lords. Now that its application to the European Court of Human Rights has failed, ADI’s last legal option to challenge the ban has closed.

But is it right for UK law simply to be left as it currently stands? A nine-eight finding by the European Court is hardly a ringing endorsement.

The current situation is akin to using a sledge hammer to crack a nut. While there may be good reason to continue to ban party political advertising to prevent well-funded political parties from subverting the democratic process by buying up the airwaves, that argument does not apply to cause-related “advocacy advertising” by organisations such as ADI. The ban has also resulted in a bar on television advertising by organisations such as Make Poverty History. What public benefit is achieved by that? (No cheap jokes about keeping Bono off our screens please.) Amnesty International has also been prevented from showing a commercial publicising the Rwandan Genocide and the RSPCA has fallen foul of the ban with its commercial alleging cruelty to poultry in the fast food industry. These examples do not give rise to any threat to the democratic process.

Given the rise in the power and importance of internet advertising and social media since the Communications Act 2003 was enacted, are concerns relating to a dominance of broadcast advertising in such cases increasingly out-dated?

A further anomaly is that commercial organisations, such as oil and energy companies, can run television commercials trumpeting their green credentials and achievements, but NGO’s such as Greenpeace and Friends of the Earth cannot respond to such claims in the same media or run advertising advocating tax breaks for green energy. Public debate therefore becomes unbalanced.

Democracy itself may be a winner from a softening of the current regulatory position, with the new advertising stimulating debate and perhaps encouraging participation by those previously apathetic about the political process. In fields such as global poverty and the environment, post-ban advertising might not prove too controversial. But advertising about issues such as vivisection or abortion, or in favour of drugs legalisation, would no doubt present a challenge to regulators forced to decide what is acceptable, without being able to hide behind the cloak of a blanket ban. However, the recent case of Transport for London refusing to allow Core Issues Trust’s “Not gay...Get over it” advertisements on the side of buses (upheld by the Courts on judicial review) demonstrates if nothing else that regulators and media owners are willing and able to grapple with contentious issues. Transport for London has heavily criticised in that case for the procedures that it applied, but ultimately its decision was vindicated.

There may be sound arguments for maintaining a ban on all advertising by political parties and on advertising that seeks to influence voters in elections and referenda, as currently exists in non-broadcast advertising. To the extent that cause-related advertising were allowed, advertisers and broadcasters would still have to self-regulate to ensure that commercials are in accordance with the law and the self-regulatory codes, particularly in relation to taste and decency, and substantiation.

The advertising regulators, such as BCAP, the ASA and Clearcast will be heaving a sigh of relief now that the ban has been upheld, as they will not have to tackle these thorny issues. Their resources are already stretched, without having to deal with such contentious issues.

But if you believe in free speech and in equality of access to the means of free expression in a democratic society, then a blanket ban on advertising by all bodies with a “political” nature, as well as all commercials directed to a “political” objective, begins to look increasing difficult to justify in the modern age of the internet.

Should employers follow Lord Sugar's lead on employment tribunals?

Wed, 17 Apr 2013 09:48:00 +0100

Many employers, faced with the prospect of employment tribunal litigation, may be tempted to throw in the towel and settle the minute the claim form hits their desk. But perhaps should they emulate Lord Alan Sugar and stand up and fight, rather than be held to ransom by compensation-hungry employees?

After his tribunal victory last week against former Apprentice winner, Stella English, Lord Sugar stated that he had been “cleared of a derisory attempt to smear [his] name and extract money...” He has reportedly promised to undertake a “personal crusade” to prevent specious claimants and the “ambulance-chasing lawyers” who advise them.

Ms English’s claim was based upon the assertions that her job was “a sham” and that she was twice forced to resign. She first worked for Lord Sugar’s company Viglen but resigned in May 2011 and subsequently started working again for him at YouView. However, she alleged she was forced to quit in October 2011 because of a breakdown in trust and confidence caused by YouView’s conduct, entitling her to resign and claim constructive dismissal.

In dismissing the complaint, the tribunal went as far as saying that this was "a claim which should never have been brought" and that Ms English (who sought legal advice before submitting her claim) was “ill advised to bring a claim and/or continue it”.

Employees who are genuinely mistreated at work should, of course, be entitled to seek redress against their employer. But in a system where unmeritorious cases are often pursued, it is difficult not to have a degree of sympathy with Lord Sugar’s views.

Moreover, employers sometimes feel that representatives cynically advise their clients to cause as much trouble as possible, merely to put pressure on the employer to offer a settlement sum to make the matter to go away. Unfortunately, on a straightforward cost/benefit analysis, it often makes commercial sense for employers to settle quickly rather than fork out legal fees to defend themselves.

Yet before Lord Sugar rushes off to moan about the “claim culture” to his colleagues in the House of Lords, he should perhaps consider the potential impact of some of the employment law reforms currently being pursued by the Government.

For example, the maximum compensatory award a tribunal can make in an unfair dismissal claim will shortly be limited to the lower of £74,200 or one year’s salary. This should to some extent manage the expectations of prospective claimants (although compensation in discrimination cases, for example, will remain unlimited). Even more significantly, from the summer, employees will have to pay an up-front fee in order to bring a tribunal claim – a change which it is hoped will deter a significant proportion of misconceived claims.

In the meantime, at least a few more employers may be encouraged by Lord Sugar’s positive outcome at the tribunal to fight their corner in appropriate cases. Ironically, given his apparently dim view of certain elements of the legal profession, this could mean lawyers more frequently being told “You’re hired!”

Initial reflections following the dawn of the new NHS PropCo

Mon, 15 Apr 2013 16:29:00 +0100

From the beginning of this month NHS Property Services Limited has been fully up and running.

NHSPS has taken over ownership of all NHS property assets and facilities, reportedly totalling some 4,000, from, predominantly, Primary Care Trusts and Strategic Health Authorities, both of which were abolished on 31 March 2013.

This note explains what NHSPS is, what it does, and what some of the implications might be for those within the wider real estate and development sector (including housing) who are already, and/or may become, involved with NHS land and associated opportunities.

What is NHSPS?

NHSPS is a private limited company, owned 100% by the Secretary of State.

What does NHSPS do?

NHSPS is intended to provide strategic and operational management of all NHS estates, property and facilities, at both a national and local level.

We understand that it’s been very much business as usual to date, with the new entity ensuring that necessary functions, systems and structures were in place at its commencement. Looking to the future, one of the main stated objectives of the new company is to ensure that ‘commercial disciplines are added to existing public sector values’.

Aside from purely operational issues, NHSPS intends to concentrate its strategic efforts on the current and future use of NHS land and, where appropriate, identify the potential to sell off surplus properties though a disposal programme – indeed, work has already begun in this regard.

Funds generated from the disposal of surplus land and buildings are intended to be used to improve those properties that are retained within the NHS portfolio (including focussing on green and energy saving initiatives).

What does all this mean for you?

We can’t cover all of the effects of the changes comprehensively within this article. However, the following issues are perhaps of particular interest.

Tenancy agreements and leases : Whilst, as one would expect, terms of existing tenancy agreements and leases will remain unaltered, NHSPS has indicated that it intends to formalise all arrangements that are in place ‘on the ground’ but which are yet to be documented. So if, for example, your lease was simply never completed, it’s likely that there will be renewed interest in this now being achieved.

Disposal of surplus land : Housing providers are among those who stand to benefit from the proposed sale of assets. Dan Poulter, Under-Secretary of State for Health, indicated last month that the disposal programme should be a ‘top priority’ for the government, and he also urged the NHS to respond to the Homes and Communities Agency’s requests for data on its property holdings. Funding has also been set aside by the government. All this is aimed at speeding up the release of NHS land to provide 100,000 more new homes by March 2015.

This is all good news - although, as with the disposal of any public land, there will inevitably be hurdles to overcome. Two such issues, which will impact upon desired timeframes, financial viability, and costs, are as follows.

NHSPS will, in its culture shift towards commerciality, undoubtedly look to be seen to be ensuring a maximum receipt in return for the disposal of surplus property. It has also been suggested that the HCA (in London, the Mayor) should play a part in the process. Arguably, one might therefore expect to encounter protracted negotiations regarding claw-back/overage arrangements, to enable NHSPS to secure a share in any uplift in value generated by future land use.
Also, there may be issues regarding the planning regime and the necessity to change the use of the land being sold. In securing planning consent for new development proposals, particularly in the housing context, the National Planning Policy Framework is likely to be of assistance, albeit that navigating specific planning policy issues on a scheme by scheme basis will usually require assistance from a planning expert. Given the nature of many NHS sites, there may also be ‘open space’ issues, including third party rights, and, more specifically, village green complications. Finally, new proposals will need to consider the particular application of the Community Infrastructure Levy, whether in the form of the Mayoral CIL (in central London) and/or the CIL to be imposed by other CIL charging authorities (accepting that certain reliefs and exceptions may apply).

Ultimately, the release of surplus NHS land is to be welcomed, particularly if it results in well connected sites coming forward, which can be developed to provide improvements for communities and an increase in housing supply.

For further information on these issues please contact Ben Halsey or Judith Damerell or your usual Lewis Silkin contact.

Arbitration and the Brussels Regulation - What next?

Wed, 10 Apr 2013 15:16:00 +0100

European Regulation 44/2001 (the Brussels Regulation) has for the last decade determined the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters in the EU. If you have litigation in Europe, the Brussels Regulation normally determines which courts could or should deal with the matter. However, the same is not the case for arbitration. The Brussels Regulation contains a well known exception at Article 1(2)(d) to the effect that the Brussels Regulation does not apply to arbitrations (the arbitration exception). Arbitration is a private dispute resolution system and so the parties’ choice of jurisdiction is to be respected.

The arbitration exception has though collided particularly with one aspect of the Brussels Regulation with unfortunate consequences. Article 27 of the Brussels Regulation provides that where there is no choice of jurisdiction and proceedings involving the same cause of action and the same parties are brought in two member states, the court first “seised” will get to deal with it first, even if it is to decide that it didn’t have jurisdiction in the first place. Any subsequently seised court has to wait in the wings as the court first seised considers the matter. The collision between the Brussels Regulation and the arbitration exception came about in Allianz SpA v West Tankers Inc (Case C-185/07) (the “West Tankers” case).

In the West Tankers case, disputes were to be referred to London arbitration under the governing contract and arbitration was commenced in London. However, insurers for one party were also able to, and did, bring proceedings by right of subrogation in Italy in breach of the arbitration agreement. An attempt by the English courts to protect the London arbitration by issuing an anti-suit injunction to prevent the Italian proceedings from progressing was not allowed by the European Court of Justice. It ruled that both the Italian proceedings and the question of whether the arbitration agreement was applicable fell within the scope of the Brussels Regulation. An anti-suit injunction was incompatible with the Brussels Regulation.

Changes to the Brussels Regulation - the Arbitration Exception

This was clearly an unsatisfactory state of affairs and it was determined that the interface between the Brussels Regulation and the arbitration exception should be revisited. It is not within the scope of this article to relate the tortuous progress of the proposal to amend the Brussels Regulation, which also dealt with things other than the interface with arbitration, but finally in December 2012 a recast Regulation was published in the Official Journal of the European Union. As is set out in the Explanatory Memorandum to the proposed amended Regulation

“The interface between arbitration and litigation needs to be improved. Arbitration is excluded from the scope of the Regulation. However, by challenging an arbitration agreement before a court, a party may effectively undermine the arbitration agreement and create a situation of inefficient parallel court proceedings which may lead to irreconcilable resolutions of the dispute. This leads to additional costs and delays, undermines the predictability of dispute resolution and creates incentives for abusive litigation tactics.”

The arbitration exception has been retained. It has further been bolstered by Recital 12. A commentator has remarked how peculiar it is that the amendments appear primarily in the recitals rather than the main body of the Regulation, but the amendments are nonetheless effective.

Comment

Recital 12 confirms that the Brussels Regulation should not apply to arbitration. It further appears to allow a party to seek an order from the court seised to dismiss the proceedings and to refer the parties back to arbitration. Alternatively, a party can apply to the court in the seat of the arbitration for an order referring the parties to arbitration. There are further useful clarifications about the exclusions from the Brussels Regulation (such as a decision of a court in a member state as to the validity of an arbitration agreement) which will limit the chances of competing decisions from different courts on arbitration matters. Further, a new Article 73 reasserts the primacy over the Brussels Regulation of the New York Convention 1958. The New York Convention is widely adopted (it applies in all EU countries) and deals with the recognition and enforcement of foreign arbitration awards. This will to an extent “uncouple” the courts of the different member states so that a court may recognise and enforce an arbitration award even if it is inconsistent with the judgment of a court of another member state on, say, the validity of the arbitration agreement.

The amendments should reduce the chance of tactical litigation preventing the court of the seat of the arbitration dealing with the matter in accordance with the parties’ wishes but it does not go as far as to allow anti-suit injunctions. We are still required to trust the judicial systems of the other member states of the EU and not to tell them what to do. Whilst many commercial parties will welcome the certainty that this change will bring, we still have to wait until January 2015 for its introduction.

Is a general strike on the cards?

Thu, 04 Apr 2013 17:31:00 +0100

Unite and Unison, two of the country’s biggest unions, have backed plans for a general strike.

If the general strike, which would involve employees from both the public and private sector, materialised it would be the first since 1926.

With much more stringent trade union laws being introduced under the Thatcher Government, many employers will be questioning whether this could really happen in this day and age.

In short, the answer is yes (to an extent!). We witnessed mass strikes for ourselves in the summer of 2012 when our GPs and hospital doctors went on strike over pension reforms. That said, organising a general strike would be far from easy. To organise mass-scale action, British trade unions have to comply with the strict procedures contained in the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”). All too often unions deviate from this complex procedure – which includes holding a compliant ballot and providing sufficient notice to the employer - giving employers the opportunity to successfully oppose and prevent the planned action.

However, recent decisions indicate that the tide seems to be turning. We have seen the courts take a more relaxed approached to TULRCA and not insist that unions follow the procedures in their totality. The Court of Appeal’s decision in RMT v Serco 2011 is a good example of this; the Court of Appeal limited the number of grounds upon which employers can challenge strike action and suggested that they were not concerned with minor breaches of the procedures. Trade unions are more than aware of this and many have been adapting their approach accordingly, providing less and less information to employers. However, one requirement that unions cannot escape from is the fact that to call workers out on strike, there must be a trade dispute between the workers and their employer. Sympathy strikes are not legal in the UK.

Trade unions, though, have started to rely more on human rights arguments to achieve its aims. Recently the RMT commenced a challenge to TULRCA’s strict procedures on collective action before the European Court of Human Rights. In its submission to the Court, the RMT claimed that ‘the right to strike is excessively circumscribed’ in Britain in breach of article 11 of the European Convention on Human Rights, which protects the right to freedom of association, including the right to form and be members of trade unions. If this claim were upheld, and UK strike laws were changed as a result, then sympathy strikes may not be unlawful and general and sympathy strikes would not be so alien. That said, if employees are going to lose their pay when on strike, there would have to be a fairly strong drive to make them strike in support of someone else’s fight.

We eagerly await the developments in this area – especially the European Court of Human Rights’ decision – to see if general and sympathy strikes will remain a thing of the past or become a part of our future. Until then, employers faced with industrial action as a result of a general strike should carefully consider if they really do have a trade dispute with their workers. That, and keep their fingers crossed that the more moderate unions remain sceptical about the whole thing. Whatever happens, a lawful general strike can’t be organised overnight and so employers will have quite some time to plan for it!

Simplifying pensions auto-enrolment - a chance to have your say!

Tue, 02 Apr 2013 15:46:00 +0100

The field of pensions auto-enrolment, which first started to apply to the largest employers in October 2012, is strewn with battle-stories of ways in which employers have managed to cope with the obligations imposed on them by the legislation.

Now it is time for smaller employers to get to grips with what they will need to do, and hopefully there will be some benefit from the lessons learned by those who have already “staged”.

Some good news - the Government also hopes to put in practice some of these lessons, and is now consulting on some proposed changes designed to fix teething problems with the regime so far.

No doubt your Staging Date for pensions auto-enrolment is already firmly in your diary. But here’s another date to circle in the calendar - April 2014, which is when the Government hopes to bring into force the changes it is now proposing. Depending on the result of the consultation, the changes may come in earlier. However, until then it will be business as usual for employers complying with auto-enrolment obligations.

The proposed changes are not set in stone, and employers will have the opportunity to comment on them until 7 May 2013. We would encourage you to make the most of this opportunity, since the consultation is directed primarily at employers.

In brief, the proposals would allow employers to:

Choose to align the “pay reference period”, for the purposes of assessing jobholder status and whether contributions on earnings meet the minimum requirements, with the pay and tax periods which payroll already use. This is a significant improvement as it matches with when employees are actually paid, but there are still differences in the definition of earnings for auto-enrolment purposes on the one hand and for tax purposes on the other.
Benefit from a respite period if a jobholder who had previously been contractually enrolled has opted out before becoming eligible for auto-enrolment. Under the current rules, employees are subject to the “yo-yo” effect of leaving a contractual scheme, but then being automatically enrolled into the same or another scheme, and having to opt out again almost straightaway. Under the proposals, auto-enrolment duties would not need to be considered again until the normal three yearly re-enrolment process.
Be more flexible about the form of an opt out notice, provided that its content and form are “substantially” the same as the notice set out in the legislation.
Enjoy an extended “joining window” (the period employers have to ensure that the jobholder becomes an active member of a qualifying scheme and to provide enrolment information to the jobholder) from one month to six weeks.
Exclude certain categories of worker from auto-enrolment such as employees with enhanced/fixed protection from the lifetime allowance tax charge, individuals who resign during a postponement period, and active members of money purchase schemes who have given notice of retirement.

There are also some additional proposed changes to the “test scheme standard” for defined benefit schemes, which govern whether a scheme is appropriate for the auto-enrolment legislation.

After the DWP’s commitment to simplify auto-enrolment, it is promising to see the consultation has finally come out - although our view is that it isn’t extensive enough to resolve all the problems employers have encountered so far...

What the consultation paper does confirm is that auto-enrolment is here to stay. This is merely a period to consult about “technical” aspects of how auto-enrolment should happen in practice, and there is certainly no suggestion that the Government will backtrack from the general principle. So if your Staging Date isn’t in your diary, it might be time to put it there!

For more information, please contact Katherine Shaw.

Bankers' bonus cap: latest developments

Fri, 22 Mar 2013 16:04:00 Z

Following further talks on 20 March between representatives of the European Parliament and the Council of the European Union, political agreement has been reached regarding the cap on bankers’ bonuses which will apply under an amendment to the Capital Requirements Directive (“the Directive”), known as CRD4.

As previously reported, the cap will be set at 1 x salary unless at least 66% of the firm’s shareholders approve an increase to 2 x salary (or at least 75% of shareholders if there is no quorum).

However, as a result of the latest negotiations, it seems that the cap will only apply to remuneration awarded for services and performance from 2014 onwards. In other words, the cap will not cover those bonuses which are paid in 2014 but which are in respect of 2013 performance.

The final version of the text is not yet available but our current understanding of how the cap will work is:

The cap will apply to banks and building societies within the scope of the Directive. Many investment firms within the scope of the Directive are also likely to be caught by the cap although this will be subject to the principle of proportionality. EU based firms will be required to apply the cap globally and non-EU based firms will be required to apply the cap to their EU sub-group. The European Commission will monitor the impact of these rules.
The cap will only apply to Code Staff. Note, however, that the European Banking Authority (“EBA”) is due to review the criteria used to identify Code Staff and this may result in an increase in the number of staff designated.
The cap will apply to the ratio of “variable pay” to “fixed pay”. The meaning of these terms is therefore crucial. “Variable pay” is currently defined as remuneration which reflects “a sustainable and risk adjusted performance as well as performance in excess of that required to fulfil the employee's job description as part of the terms of employment” whilst “fixed pay” is currently defined as remuneration which “primarily reflect[s] relevant professional experience and organisational responsibility as set out in an employee's job description as part of the terms of employment”. These terms are ambiguous but we are not aware of any proposal to amend the definitions. Hopefully guidance will be issued clarifying their meaning.
25% of variable pay which is delivered in the form of non-cash instruments, deferred for more than 5 years and subject to claw-back will be valued at a discount to take account of inflation and other market risks. This will effectively increase the cap, although it is not clear that the increase will be significant. The EBA is expected to publish guidance by the end of March on valuing long term variable pay. It will also provide guidance on the type of non-cash instruments that may be used.

The European Parliament is due to vote on the cap in the plenary session on 15-18 April. If approved, member states will be required to implement the legislation by 1 January 2014 but, as stated above, the cap will only apply to variable pay in respect of performance in 2014 and subsequent years.

Although the current focus is on bankers’ bonus it is likely that a cap will be introduced to other financial services sectors in due course. A proposal was made this week to cap the bonuses of managers of UCITS funds and we expect something similar for the managers of alternative investment funds. It seems that there will be no respite for the financial services sector.

Mirror, mirror on the wall....

Fri, 08 Mar 2013 08:07:00 Z

Many believe that when and where we work will matter less in years to come. Over the last decade, there has been an increasing shift away from office-based working to a more flexible working environment in those industries which can support such a move. This has allowed employees more control over where, how and when they work, and how they choose to balance work, family and outside interests. Those who support this progression say that in turn, and contrary to the belief of some sceptics, employees will be more engaged and productive.

But does Yahoo! CEO Marissa Mayer’s decision to get Yahoo! telecommuters back from home into the office signal the beginnings of a backlash against this trend? Or just teething problems as the world of work grapples with the inherent difficulties in managing and motivating a remote workforce, particularly in difficult economic times?

The move towards a more flexible way of working has been influenced by a number of different factors. Technological advances have been a major contributor. Widespread availability of broadband has given more employees the ability to access employer IT systems remotely and effectively. Working outside of the office has become a practical reality. The introduction of the right for parents and carers to request flexible working has increased awareness, and forced employers who had not previously considered it to give it careful thought.

Many commentators on the future of work agree that this trend is set to continue into 2020 and beyond. Technology will advance further and make working remotely possible for an increasing number of job roles. Developments in the employment law arena also support moves towards a more flexible workforce. The statutory “right to request” to work flexibly will be extended to everyone in 2014 and whilst there is nothing stopping anyone from making a request at present, a wider statutory right may prompt more employees (and employers) to look at the options. The move to a shared parental leave system rather than separate maternity and paternity leave systems may mean more men consider flexible working options. Furthermore, 2020 will see the first of the post-millenials, who have grown up with their virtual and physical worlds fully integrated, entering the workforce. They are predicted to have quite different expectations as to how their work-life should look.

But does the Yahoo! decision – and the support this has generated from other businesses and commentators (notably, Alexandra Shulman of British Vogue) – sound a warning bell? There are additional challenges which come with managing a remote workforce. Being present in an office can facilitate interaction with colleagues, casual conversations and impromptu meetings. Decisions are made more quickly and creativity can flourish. Technology has not quite found a way to replicate face-to-face contact and the immediacy which accompanies it. Working in isolation can lead to being left out of those encounters and out of the loop – both on day-to-day matters and when it comes to bigger issues such as career progression and promotion. In some cases, those working remotely might become disengaged and demotivated, and productivity and commitment may suffer as a result.

Some might say that this is something which has been obvious all along. However, there is no doubt that technological advances will facilitate opportunities for ever greater working flexibility in the future. As the employment relationship evolves and the shape of the employment “deal” continues to be subject to increasing pressures, employers need to be ready to adapt and consider how best to make a more remote and flexible workforce “workable” for the future.

To consult or not to consult?

Thu, 07 Mar 2013 16:16:00 Z

Daejan Investments Limited carried out works to a building in Muswell Hill and under section 20 of the Landlord and Tenant Act 1985 were required to consult with leaseholders. Deajan did not fully comply and the Leasehold Valuation Tribunal (LVT) rejected an application for dispensation resulting in leaseholders having to pay £250 each for works and Daejan being down by £278,750. Not surprisingly Daejan appealed. On 6 March 2013, Daejan succeeded in obtaining a dispensation on terms. Unfortunately, Daejan has had to go to the Supreme Court!

Although Daejan is a private landlord the decision is relevant to Registered Providers (RPs). So, when should an RP consult? RPs must consult where certain qualifying works are to be carried out and a variable service charge is applied. RPs need not consult where they charge a fixed service charge (e.g. where additional costs cannot be recovered at the end of a financial year).

RPs must now consult before carrying out qualifying works where a leaseholder/tenant will be charged more than £250 in a financial year (see “Qualifying works and consultation: a radical change?” article). Various notices must be served; the rules are prescriptive and errors can occur. If so, RPs can apply to the LVT to dispense with the consultation requirements. That is where Deajan is relevant as the Supreme Court provided guidance. In summary, the salient points are:-

In deciding whether to dispense with the consultation requirements the main question for the LVT is whether tenants have been prejudiced by the landlord’s failure. Prejudice could be that the works did not meet the requisite standard or tenants have had to pay more than they would have done had a different contractor been appointed.
In resisting a claim for dispensation the burden is on tenants to prove they have suffered prejudice.
The nature of the landlord (e.g. RP) is irrelevant when considering a dispensation application as are the financial consequences to the landlord.
The LVT can attach conditions to a dispensation such as reducing the amount claimed or requiring a landlord to pay the tenants’ costs of the application.

The Daejan decision assists landlords: it makes clear that if tenants are not prejudiced the landlord should be able to obtain dispensation. Furthermore, tenants will find it more difficult to use technical breaches of the regulations to limit the amount recoverable to £250.

Dispensation applications are no longer all or nothing. Daejan were looking to recover just under £280k but the statutory cap, having failed to consult was £1,250. In the end, the amount Daejan was entitled to recover was reduced by £50,000 as it had agreed to pay the leaseholders’ costs. Future battlegrounds are likely to be the extent to which tenants are prejudiced by breach and the conditions imposed by the LVT. Except for serious breaches landlords can probably expect to obtain dispensation, but at a cost.

For further information on this topic please contact Simon Bagg or Paul Hayes.

Collective agreements and TUPE - more dynamic than you might think?

Thu, 07 Mar 2013 09:51:00 Z

When employees transfer to another employer under TUPE, their terms and conditions usually transfer along with them and any collective agreement that applied to their previous employment continues to apply. But what happens if their employment contracts say that terms and conditions will be determined by collective agreements negotiated “from time to time” by the former employer and union? Are the new employers bound by later changes to a collective agreement to which they are not even a party?

The Advocate General of the European Court of Justice (ECJ) thinks they can be bound in this way, and has issued an opinion to this effect in Parkwood Leisure Ltd v Alemo-Herron and others. This case concerned employees who were originally employed by the London Borough of Lewisham. Their pay was determined by a collective agreement between the employer and the National Joint Council for Local Government (the “NJC”). Following two TUPE transfers, Parkwood Leisure Ltd (“Parkwood”) became the new employer. Subsequently, a new collective NJC agreement was negotiated, without any participation by Parkwood. The new agreement increased pay scales.

Parkwood’s employees argued that their pay should also increase, on the basis that TUPE allows a “dynamic” approach to the transfer of collective agreements - meaning that any changes to the collective agreement post-transfer would still apply to transferred employees. Parkwood argued for a “static” interpretation, which would mean that the collective agreement only applies as at the date of the transfer and any subsequent changes to the agreement would not apply to them as the new employer. The case went right up to the Supreme Court whose judgment suggested that the UK should adopt a dynamic approach, unless the ECJ rules that this is precluded by relevant the EU Business Transfers Directive. The Supreme Court made a reference to the ECJ on this point.

The ECJ has yet to make a decision but, as is customary, the Advocate General has issued an opinion on the case. In most cases the ECJ follows the opinion in its judgment, so it is significant that the Advocate General has stated that there is no bar to UK legislation allowing a dynamic approach to collective agreements. In fact, he notes that the UK has not even chosen to limit the ongoing application of future collective agreements to one year (which is expressly permitted by the Directive).

We still need to see whether the ECJ agrees with the Advocate General. However, pending a final answer, due diligence on any TUPE transfer should include a careful review of any clauses incorporating collective agreements into employment contracts. It appears that new employers may find themselves bound by negotiations to which they were not even a party. They should consider seeking protection from future changes to collective agreements, for example by requiring an indemnity. Employers drafting employment contracts should also be aware of the potential consequences of a dynamic approach to the incorporation of collective agreements. Although it is the new employer who will face the ultimate consequences, the presence of a dynamic clause in the contracts may affect the commercial terms of any deal which involves a TUPE transfer.

The Government has recently announced proposed changes to TUPE to take place over the next three to five years (see our previous Journal articles here and here). The dynamic/static debate is something to add to the ever-growing list of potential reforms!

Don't ignore the writing on the wall...

Tue, 05 Mar 2013 11:42:00 Z

Employers are well aware of the need to have a written disciplinary procedure in place. However, the importance of the specific wording of such a policy can sometimes be underestimated by employers. The recent decision of the Court of Appeal in Tayeh v Barchester Healthcare Ltd is a useful reminder of the value of a well-drafted disciplinary policy when an employer is looking to dismiss an employee for misconduct.

In misconduct dismissal cases, an employer must show it had a genuine belief in the employee’s guilt, being a belief based on reasonable grounds after the carrying out of a reasonable investigation. A tribunal must decide whether the employer’s response to the misconduct falls within the “range of reasonable responses” that might be adopted by a reasonable employer, but it must not substitute its own view.

Ms Tayeh, a care home nurse, falsified a patient’s medical record and failed to carry out observations on a patient who had suffered a fall. She was summarily dismissed for gross misconduct. Ms Tayeh’s contract of employment incorporated the company’s employee handbook. This included a disciplinary procedure which set out a non-exhaustive list of 28 types of conduct the employer considered to be ‘gross misconduct’, such as breaching health and safety rules, failing to administer or mismanaging drugs and falsifying written records.

The tribunal decided that Ms Tayeh had been unfairly dismissed. In the tribunal’s view, falsifying records was insufficiently serious in comparison to the other types of gross misconduct listed in the policy, and as such, fell outside the “range of reasonable responses” and was not a reasonable ground for dismissal.

On appeal, both the Employment Appeal Tribunal and the Court of Appeal decided that the tribunal had failed to apply the proper test of whether the employer’s actions fell within the “range of reasonable responses” and had substituted its own view for that of the employer. The tribunal’s view that the falsification of company records was less serious than the other types of gross misconduct referred to in the policy was not justified.

Importantly, both the EAT and the Court of Appeal placed weight on the fact that the falsification of records was explicitly listed in the employer’s policy as a ground for gross misconduct - a clear indication to employees of the seriousness with which such behaviour was viewed.

We have previously commented in our Journal on the need to draft contracts of employment carefully and review them regularly to ensure that they are up to scratch. The importance of doing the same with workplace policies, whether contractually binding or not, should not be overlooked. A well-drafted disciplinary policy will ensure that an employer’s views on what it considers gross misconduct are accurately captured and will place the employer in a strong position in defending a claim.

Migration Statistics Quarterly Report: Fall in Net Migration into the UK

Mon, 04 Mar 2013 10:46:00 Z

The latest Migration Statistics Quarterly Report that has just been published by the Office for National Statistics reveals that there has been a drop in the net flow of migrants to the UK. Net migration to Britain fell to 163,000 in the 12 months leading to June 2012 from 247,000 in the year ending June 2011.

While this 34% decline is significant, the Government has yet to reach its pledged aim to reduce annual net migration to below 100,000 by the time of the next general election in 2015. According to the report, the fall in net migration numbers is mainly attributable to a decrease in immigration. 515,000 migrants entered the UK in the year ending 2012, representing a fall of 74,000 from the preceding year. Furthermore, the number of citizens migrating to Britain from EU accession countries (namely the Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia and Slovenia) has reduced by over a quarter since the previous year to its lowest level since 2004. The report suggests that this may be an effect of the expiry in 2011 of transitional controls applying to citizens from these accession countries, which were never adopted in the UK but were in place in most other EU member states. The lifting of such controls may have diverted migration from accession countries into other member states such as Germany.

There is no significant change in the numbers entering or leaving the country for work-related reasons. Study remains the most common reason for coming to the UK. However, the number of visas issued for study purposes has fallen by 20% from the previous year. The Institute for Public Policy Research has identified this fall as the principal factor in the overall decrease in net migration, noting its effect is only short-term, since most students do not stay in the UK for a long period of time. As such, the think tank warns that reduced immigration now may lead to reduced emigration in the future. This has the potential to reverse the reported fall at least partially by 2015.

The inclusion of overseas students in the figures for net migration has proved to be controversial. Several advisory bodies have called for foreign students to be recorded under a separate classification. This, they argue, would recognise the distinction between permanent immigration and study and demonstrate that the UK values the contributions of foreign students to innovation and to the domestic economy. Only this month, the Director of the group Universities Scotland highlighted that the number of Indian students embarking on Scottish university courses had fallen by over 25%. This is at odds with the Prime Minister’s very recent pledge to boost British-Indian relations by facilitating the immigration process for Indian nationals.

If you have any questions about these issues or would like further information please contact Andrew Osborne, Raj Shah, or your usual Lewis Silkin contact.

Putting the 'Pa' into Parental Leave?

Mon, 04 Mar 2013 10:36:00 Z

The Government has just released a consultation document seeking views on the administration and practical implications of its proposed new right to shared parental leave. The intention is that from 2015 mothers will be able to commit to ending their maternity leave and share the remainder of the leave (known as ‘shared parental leave’) with their partners. This will be different from the current arrangement of ‘additional paternity leave’, which fathers can only take if the mother has returned to work and which cannot start until twenty weeks after the child’s birth (additional paternity leave and pay will be abolished when the new regime comes into force).

Under the new arrangements, parents can trigger the scheme and divide up the shared parental leave and pay entitlements between them, subject to the two weeks of post-birth compulsory maternity leave. They can choose to take the leave concurrently, to alternate throughout the year or for just one of them to take it all (even, gasp, just the father). No more than one year’s leave can be taken in total and only 39 weeks will be paid (at the same rate as statutory maternity pay). Two weeks’ paternity leave will be retained on a ‘use it or lose it basis’ in a single block of one or two weeks, to be taken within 56 days of the birth. The proposals will also apply to surrogacy and adoption arrangements.

The proposals are intended to produce a cultural shift within the workplace, giving parents much greater flexibility than ever before and encouraging fathers to take a more active role in childcare. But employers may be concerned about how the practicalities will affect their business.

Both parents must be economically active and have sufficient length of service to qualify for the scheme. They must give eight weeks’ notice to end the maternity leave and enter into the shared parental leave scheme, and employers and employees then have a two-week discussion period to agree the leave. The notice requirement provides some certainty for employers, although two weeks is not a particularly long time to agree the pattern of leave, especially if the pattern is not straight forward. Employees will not be required to set out their plans for the whole period of leave upfront and there is no limit to the number of times parents can transfer leave and pay entitlement between them (subject to eight weeks’ notice), allowing them to ‘drip feed’ plans to employers. Employers may find they have to organise short-term replacements or run the risk of overburdening other members of staff, if parents choose to take the leave in smaller, more intermittent blocks. Alternatively, an employer can refuse the requested pattern of leave (see below).

It is also not clear what rights the employee has if the employer does not adhere to the discussion timescale. If an agreement cannot be reached, the Government proposes that the total amount of leave requested is taken in a block beginning on a date the employee chooses. However, this may not benefit either employer or employee and if one parent’s employer agrees but the other’s doesn’t, both employees may need to submit new notices.

The consultation paper invites views on how to deal with the right to return to the same job following the leave. This may prove to be an important factor for some households when deciding how they structure shared parental leave. For employers, it will involve careful planning and handling to ensure they keep posts open for employees taking shared parental leave. The proposal to introduce an additional 10 keeping in touch (KIT) days per parent during shared parental leave may assist with this. The proposal suggests these are used to trial new working arrangements or to allow for a phased return to work. This is a significant increase in the number of KIT days, but may require another cultural shift in sectors where KIT days are not regularly taken.

How much difference will the proposals make in practice? Not many fathers have taken advantage of the current additional paternity leave arrangements or the right to make flexible working requests, for a variety of reasons including financial and cultural reasons. It may take more of a carrot than these proposals provide – in particular more pay – in order for the uptake to be significant and to kick start that sea change in workplace and childcare practices. It appears BIS is of the view that employers can pay enhanced pay to women on maternity leave or shared parental leave and not to extend enhanced pay to the mothers’ partner on shared parental leave. Many employers may be unwilling to offer enhanced paternity pay to fathers in addition to mothers due to increased costs. In spite of the Government’s apparent approval of such a difference in treatment it seems inevitable that such treatment will, sooner or later, be challenged on grounds of discrimination.

Termination: the seller keeps all?

Fri, 01 Mar 2013 12:26:00 Z

For almost 60 years the court has been asked to consider what happens to money already paid by way of instalments in relation to a contract if the contract is rescinded and the seller retains the property which is the subject matter of the contract. In summary the cases have held that if the pre-payment of an instalment is not intended to be a forfeitable deposit, the seller’s right to retain the instalment is conditional upon completion of the contract and the transfer of title of the property to the buyer. In order to determine whether it is a forfeitable deposit, you have to consider the terms of the actual contract as a whole.

In Cadogan Petroleum Holdings Limited -v- the Global Process Systems LLC [2013] EWHC 214 the court has had to address the question once again. Was it right that the seller was able to retain the $7.5 million that had already been paid by the buyer as part payment for the manufacture of plant and equipment for a large gas plant, where the seller, due to the buyer’s breach was able to rescind the contract and keep all the equipment? In addition the seller claimed additional sums which were due and payable before the contract was rescinded but which had not been paid.

On the basis of the terms of the contract, the court held that at the time that the contract was rescinded, the seller had accrued rights in respect of the instalments already paid and the instalments which were due and payable but which had not been paid by the buyer. Therefore the seller was entitled to keep the sums paid and the equipment (as well as being entitled to recover sums which should have been paid by the date of rescission).

The court also considered whether the fact that the seller was able to retain the instalments paid and recover the instalments due and payable as well as retain all of the equipment amounted to an unenforceable penalty. The court had recently considered a similar question in the case of Cavendish Square Holdings BV –v- El Makdessi [2012] EWHC 3582.

In Cavendish the court held that a clause which as a result of the breach entitled the innocent party to withhold monies which were due and payable was capable of amounting to a penalty. However in Cadogan the right to forfeit did not arise purely as a result of the breach. The money had already been paid and/or was already due and payable. While some cases have suggested otherwise, the court in Cadogan held that the law on penalty clauses only properly arose when the entitlement happens on breach. The rule did not apply to sums which were due and payable on events other than breach. The right to pay the monies arose in Cadogan before and independently of the breach. Further the law on penalties does not apply to deposits or clauses providing for forfeiture of sums already paid. Unfortunately the Judge in Cadogan was not referred to the earlier Cavendish judgment.

In my view Cadogan may be too narrow an interpretation. It does not appear to sit happily with other cases. Given the fine dividing line and the fact that we now appear to have two first instance decisions which could be said to be inconsistent with each other, I guess that certainty will have to wait until another day when the Court of Appeal comes to decide the matter. Until such time, I guess you pay your money and you take your chances (although, with the Olympics still not too distant a memory, my money is on Cav). However perhaps in the meantime, the real answer is do not allow events to occur which enable the other party to rescind the contract.

Bankers' bonus cap a step closer

Thu, 28 Feb 2013 17:16:00 Z

A meeting earlier this week between EU officials, members of the European Parliament and the European Commission brought a cap on bankers’ bonuses a step closer, despite strong opposition from the UK. As a result of the latest negotiations, the cap looks likely to be set at 1 x salary unless at least 65% of the firm’s shareholders approve an increase to 2 x salary (or 75% of shareholders if there is no quorum).

The 2007-08 banking crisis resulted in an unprecedented focus by governments, the media and the public on remuneration within the financial services sector. Provisions to regulate such remuneration came into effect on 1 January 2011 under what is known as “CRD3” - an amendment to the Capital Requirements Directive (“the Directive”).

The purpose of CRD3 was to align remuneration principles within the financial services sector across the EU and, in particular, to impose restrictions on the structure, amount and timing of bonus payments. CRD3 was concerned with ensuring that remuneration reflected performance rather than the quantum of remuneration. That is now set to change with a further amendment to the Directive, referred to as “CRD4”.

In May 2012, the Economic and Monetary Affairs Committee of the European Parliament (“the Committee”) voted on a proposal under CRD4 to set a maximum ratio of fixed remuneration to variable remuneration of 1:1. Variable remuneration for these purposes included all bonuses and long-term incentive plans.

The proposal was highly controversial and in December 2012 the Committee met with a negotiating team from the EU Council to agree a compromise. The compromise position at that stage was that the salary to bonus ratio should not exceed 1:1 unless more than 75% of the firm’s shareholders approved an increase to 1:2.

The UK government has always strongly opposed any cap on bonuses, but its attempts over the past few weeks to block the compromise have failed.

The details of the agreement reached this week are unclear at this stage. The cap will apply to banks, building societies and investment firms within the scope of the Directive – EU based firms will be required to apply the cap globally and non-EU based firms will be required to apply the cap to their EU sub-group. It seems that all variable remuneration will be subject to the cap, but there will be special provisions for valuing long-term incentives in the form of equity or debt instruments which may help to increase the ratio above 1:1 or 1:2. To encourage firms to take a long-term view, if variable remuneration is increased above the 1:1 ratio, 25% of the bonus must be deferred for at least five years.

EU finance ministers will now debate the proposals at a meeting on 5March, with the European Parliament due to vote on the legislation in the plenary session on 15-18 April. If approved, member states will be required to implement the legislation by 1 January 2014. Accordingly, the cap will potentially apply to any bonuses which are paid in 2014, even if in respect of 2013 performance.

In practice, if implemented, the bonus cap will be a backwards step in regulating pay in the financial services sector since it will reduce the amount of pay which is subject to performance and is likely to increase the complexity of incentive plans. We are already seeing, as one reaction to CRD4, a significant increase in base salaries which are paid irrespective of performance. If the legislation is approved, firms will need to act quickly to make decisions on pay policy and revise bonus plans and guidelines.

Exclusion clauses: A more restrictive approach?

Fri, 22 Feb 2013 15:41:00 Z

While lawyers were all brought up on the principle of “freedom to contract”, there appears to be a growing trend that the Courts are today prepared to take a more restrictive approach when it comes to construing scope of an exclusion clause. The latest example of this can be found in the recent Court of Appeal case of Kudos Catering (UK) Limited –v- Manchester Central Convention Complex Limited [2013] EWCA Civ 38.

Background

As you can tell from the name of the case, the Defendant owns the large convention centre in Manchester. It engaged Kudos to provide the exclusive catering services at the venue for a five year period. As part of the contract, Kudos was required to invest substantial sums in catering equipment for the venue. Part way through the contract, the Convention Centre wrongly purported to terminate Kudos’s contract, thereby committing a repudiatory breach. Kudos accepted the breach, terminated the contract and claimed damages.

Part of its claim consisted of a £1.3 million claim for loss of profit (being the profit that Kudos claimed it would have made had the contract been left to run its proper course). “Forget it” responded the Convention Centre. “Read the contract.” Sure enough, buried within the contract was a term which stated that the Convention Centre would have no liability whatsoever for any claim for loss of goodwill, business revenue or profits.

Decision

Kudos spoke to its lawyers and asserted that the clause, on its true construction, did not exclude the Convention Centre’s liability. While Kudos lost the argument at first instance, it thought it was on to something and went to the Court of Appeal.

The Court of Appeal looked at the claim, looked at the wording of the clause and the contract and considered the purpose of the contract as a whole and how it was meant to work.

If the court sided with the Convention Centre, Kudos, would be left without any remedy whatsoever. Practically speaking, Kudos could not refuse to accept the Convention Centre’s repudiatory breach and continue to provide catering at the venue against the Centre’s true wishes.

The Court decided that whatever the parties had in mind when they agreed the clause, one thing that they could not have intended was that the clause would have such a wide ambit so as to rob one party of all contractual force. It just did not make business commonsense to deprive the contract of its commercial objective. Previous cases have held that a Court should start with the assumption that neither party, when entering into a contract, intends to abandon its remedies. Clear words are required to do so. But when deciding whether or not the words are clear, the court held that one should not confine oneself to the four lines of the clause itself, but should consider the wording of the clause in their wider context. The Court found that if the parties had really intended to exclude all financial loss in the event that one party refused to perform its obligations, the parties would have spelt this out clearly in a free standing clause. Here the clause was buried deep within a series of sub-clauses dealing with indemnities and insurance provisions.

The Court concluded that the exclusion clause in this case restricted a claim for financial loss in the respect of poor performance as opposed to non-performance.

Comment

Previously we have seen the Courts struggling to see why an exclusion clause should have effect where there has been a deliberate and knowingly unlawful breach by one party. Here we have an example of the Court refusing to believe that one party would agree to throw away all of its contractual remedies in the event of the other party wrongfully refusing to allow it to perform what would have been a long term valuable contract.

Again we see a fine example of the Court reading what some would say was very clear unambiguous words in such a way as to ensure the result was in line with good commercial commonsense. Whoever said that the judiciary was out of touch?.......

You can read the full Court of Appeal judgement of Kudos Catering (UK) Limited –v- Manchester Central Convention Complex Limited [2013] EWCA Civ 38 here.

For more information contact James Levy or your usual Lewis Silkin contact.

The UK Border Agency enters the Dragon's Den

Thu, 21 Feb 2013 16:16:00 Z

The Tier 1 Entrepreneur visa route was introduced to enable non-European migrants to invest in the UK by setting up or taking over a business. From 31st January 2013, individuals applying to enter the UK on a Tier 1 Entrepreneur visa will face a new test arguably more familiar to contestants on the BBC’s popular TV show, Dragons Den. The UK Border Agency (‘UKBA’) now has the power to assess the merits of an entrepreneur’s investment plan by inspecting their business models, financial viability and overall credibility.

UKBA have termed this a ‘Genuine Entrepreneur’ Test and it is being implemented, in theory, to enable UKBA caseworkers to identify ‘suspicious applicants’ and prevent abuse. The Government’s rationale for the amendment to the rules was conveyed in a Ministerial statement released to accompany the changes. This cited an ‘unprecedented surge’ in the number of applications under the Tier 1 Entrepreneur visa route in the space of a year, from 639 in 2011 to 6878 in 2012. The suspicion is that many of these new applications are bogus and therefore the new test will ensure that only the genuine applicants are granted visas.

The increase use of the Tier 1 Entrepreneur route is perhaps not surprising in light of the recent closure of two other Tier 1 visa routes: Tier 1 Post-Study Worker and Tier 1 General. These visas enabled individuals to work or set up businesses in the UK without requiring a UK company as a sponsor. Since their closure the UK remains as popular as ever as a destination for work. Under these circumstances migrants will naturally look for alternative solutions. The issue they face, of course, is the UKBA’s ever tightening remit of the available routes of migration.

One of the changes to the rules for entrepreneurs introduced from January appears to be grounded in good sense. The purpose behind the Tier 1 Entrepreneur route is to allow migrants to come to the UK in order to establish new, or invest in current British businesses. Previously, an applicant need only show that they held £200,000 (or £50,000 depending on the circumstances) available to them at the point of application to be granted a three-year visa. This potentially invited abuse, as there was no obligation to invest or even retain the money once the migrant was in the UK. Applicants will now have to demonstrate that they have the funds until they make their investment in UK business. If they fail to do this the visa can be revoked.

The Genuine Entrepreneur Test is more problematic. This test dictates that a decision maker, such as Entry Clearance Officer or UKBA caseworker, has to be satisfied that the applicant genuinely intends to establish or take over a UK business before they can grant a visa to them. Decision makers are afforded an extraordinary level of discretion when making this conclusion. They can have regard to the applicant’s employment and immigration history as well as any other information they think is relevant. This appears to be a distinct step away from the ‘objective’ and ‘transparent’ processes heralded by the UKBA as the fundamental basis for the Points Based System.

At the same time, applicants are not being given clear guidance about the evidence they need to submit in order to prove their cases. The test makes mention of a number of documents the decision maker can have regard to when assessing how viable an entrepreneur is, for example a business plan or examples of market research that the applicant has conducted. An applicant is, however, not required to submit these documents nor is any guidance provided as to what form they must take. It is therefore difficult for an applicant to know what they should submit in order to pass the test.

Most worryingly though, the Government has placed a great deal of faith in UKBA caseworkers to make sound judgments about business, judgments that even seasoned investors would struggle to make with any certainty. It leaves the potential that a UKBA official could prevent the next big British business or invention coming to fruition because that official felt the business plan wasn’t good enough. The end result is individuals with innovative or imaginative new business ideas may be turned down due their lack of experience or the ‘moving goal posts’ being subjectively applied by Entry Clearance Officers. This can only stifle innovation and enterprise and potentially make the UK a less attractive option for entrepreneurs.

Comparing apples & pears, comparative advertising rules loosened

Thu, 21 Feb 2013 14:22:00 Z

The UK Advertising Codes have been amended to loosen the rules on price comparisons, doing away with the previous requirement to compare goods or services that are “identical or substantially equivalent”. This will allow own label brands to make comparisons with premium branded equivalents, much to the elation of supermarkets and other retailers.

Until now (well, yesterday in fact, 20 February 2013) the UK Advertising Codes prevented advertisers from comparing products based on their price, unless the comparison was against “an identical or substantially equivalent” product. This restricted the range of products that an advertiser could choose to compare their product against - a supermarket could not for example compare its own label washing-up liquid against a branded washing-up liquid.

In fact, the old rule went further than it should have done. The Comparative Advertising Directive says that comparative advertising must: not be misleading; compare goods or services that meet the same needs or intended purpose; and objectively compare one or more verifiable feature (for example the price). The restriction to comparisons between "identical or substantially equivalent” goods or services added a further requirement to the checklist, which the Directive does not allow.

Following a period of consultation starting in March 2012 (yes, changes to the rules take that long!) CAP and BCAP have now decided to remove this constraint, bringing the UK’s regulatory system into line with the Directive and opening up comparative advertising to comparisons between products that are not necessarily identical or substantially equivalent.

Advertisers will still need to ensure that the goods or services compared do meet “the same need or [are] intended for the same purpose” (Rule 3.34). This means you can’t compare jam with, say, bleach, but then it wouldn’t be a useful comparison if it didn’t meet the same need or intended purpose.

Crucially, advertisers wanting to include a price comparison will also still need to “make the basis of the comparison clear” (Rule 3.39, as revised). In the Pricing Regulatory Statement CAP/BCAP give the following example: “a retailer would be required to state if premium goods were being compared with non-premium goods”.

The existing requirement that the comparison is not misleading about the advertised product or the competing product (Rule 3.33) also remains. Presumably the more complex the products or services being compared, the more the advertiser is likely to have to flag up technical or qualitative differences between its own label product and the higher-priced branded product.

For more information on the revised UK Advertising Codes please contact Duran Ross, Giles Crown, Geraint Lloyd-Taylor, or your usual Lewis Silkin contact.

Not as safe as houses

Wed, 20 Feb 2013 17:52:00 Z

The Court of Appeal has ordered HSBC to pay £180,000 compensation to Mr Rubenstein for negligently advising him on how best to invest the proceeds of sale of his house. In this customer friendly decision the court overruled the first instance judge who ruled that his loss was not foreseeable and too remote.

The facts

Mr Rubenstein sold his house in the summer of 2005, receiving £1.25 million on completion. He and his wife intended to rent for a time before looking to buy another home, and wished to place the money on deposit in the interim. Mr Rubenstein was a customer of HSBC. He researched the bank’s deposit rates and found that these were capped at £1 million. He then approached the bank direct to see whether he could get a better rate.

The HSBC financial adviser, Mr Marsden, mentioned an investment in the Enhanced Variable Rate Fund (EVRF) within the AIG Premium Access Bond. This paid a higher rate of interest (some 1.85% gross) than HSBC were offering.

Mr Rubenstein made two points that proved of particular importance to the eventual legal analysis.

The first was that “we can’t afford to accept any risk in the investment of the principal sum”, and Mr Marsden reassured him that “we view this investment as the same as cash deposited in one of our accounts”. (Indeed, with unwitting irony, Mr Marsden also declared that “the risk of default ... is similar to the risk of default of Northern Rock”.)
The second was that Mr Rubenstein stressed that “we are very unlikely to need this account for more than a year; probably less.”

The money was transferred to AIG in September 2005. However, Mr Rubenstein and his wife were unable to find a suitable house and were still fully invested in the EVRF when the market turmoil arising out of the collapse of Lehman Brothers occurred in September 2008. It transpired that the EVRF was in fact invested in a range of short-term and less short-term securities, including commercial paper linked to securitised loans in the US sub-prime mortgage market. And so the amount that the investor would receive was not guaranteed, but dependent on the value of the fund at the time of withdrawal. In Mr Rubenstein’s case, when he eventually cashed out his investment on 15 December 2008, he suffered a capital loss of nearly £180,000. Mr Rubenstein complained that he had been missold the investment in the EVRF and sought to recover his loss from HSBC.

The courts’ analysis

The judge at first instance found little difficulty in determining that HSBC, via Mr Marsden, had been negligent, in breach of contract (failing to provide advice of the proper description in exchange for the fee paid) and in breach of statutory duty under section 150 of the Financial Services and Markets Act 2000 for breaching various rules of the Financial Services Authority (FSA). However, he held that Mr Rubenstein was entitled only to nominal damages. This was on the basis that the loss was unforeseeable and too remote, and caused not by Mr Marsden’s negligent recommendation but by the market convulsion that surrounded the collapse of Lehman Brothers in 2008.

On appeal, the Court of Appeal allowed Mr Rubenstein to recover his loss. Noting that Mr Marsden had misled Mr Rubenstein into thinking he had invested in something which was the same as cash, Rix LJ wryly remarked:

"This is not, to my mind, a promising context in which to find that a loss suffered as a result of following a recommendation to enter into an unsuitable investment, when that loss came about because of the very factor which made the investment unsuitable (namely its inherent susceptibility to risk from market movements) was too remote to be recovered from the defaulting advising bank."

So far as foreseeability was concerned, the Court of Appeal held that, though the extent of the run on the AIG funds might have been unforeseeable, it was not the run that caused Mr Rubenstein’s loss. Rather, the loss was caused by the collapse in the value of the investments in which the EVRF was invested. And this was both foreseeable and foreseen, as the product literature which Mr Rubenstein was given before investing in the EVRF alluded to this very circumstance. The Court of Appeal also took comfort from the fact that decisions of the Financial Ombudsman Service and of the FSA in relation to the EVRF supported the court’s analysis.

Our conclusions

The Rubenstein case contains a very useful summary of the present state of the law relating to remoteness of damages, but that is not its only point of interest.

Neither the first instance judge nor the Court of Appeal considered as relevant to the issue of liability the fact that Mr Rubenstein had signed a declaration that he had read and understood the product information relating to investment in the EVRF (which revealed in a “Risk Factors” section that the value of the investment could go down as well as up). Indeed, the first instance judge expressly found that Mr Rubenstein did not understand how the investment worked, even though as a solicitor Mr Rubenstein was presumably well used to reading and construing complex documents and querying points he did not understand. Nor was Mr Rubenstein under any obligation to consider how, if it were the same as cash, the EVRF could offer a significantly better rate than the HSBC deposit rate. This suggests that where there is a contrast between investment advice from an FSA authorised person and the documentation relating to the product advised on, the courts would not regard this as a “flashing red light” that should prompt a retail customer to make further enquiries. This is a very customer-friendly result.
HSBC argued that the investment was designed as short-term only, and that a loss two years outside the period which Mr Rubenstein indicated the investment would be held was beyond the scope of the bank’s duties of care and foresight. The Court of Appeal regarded this argument as powerful, but concluded that because the time for investment was until the Rubensteins had bought a house, and that was by definition uncertain, there was the possibility that the specified probable timescale of a year or less would be exceeded; and since both sides thought they were dealing with a cash deposit, a period of three years was not significantly different from one year in relation to such an investment. This neatly avoids the difficult question of how long the bank’s duty would last in this circumstance; that said, one suspects that had the legendary officious bystander asked both sides “Is this investment intended to last for three years?” both sides would have replied “Of course not”.

For more information on these issues please contact Owen Watkins or your usual Lewis Silkin contact.

Is your “take or pay” clause enforceable?

Wed, 20 Feb 2013 17:41:00 Z

The case, E-Nik Ltd v Department for Communities and Local Government, involved a “take or pay” clause, which the court decided could potentially be a penalty clause.

This illustrates that the type of clause that may be considered a “penalty”, and so not enforceable, is not always obvious. You should consider carefully any clause which provides that punitive obligations will be triggered by a breach of contract.

When negotiating a contract, if you want to protect yourself from something going wrong, you may be tempted to include a clause which has the effect: “If you breach this contract, you will suffer a fate worse than death”, or, more usually, “... you have to pay me £[a lot]”).

It has long been established that clauses which are intended to place undue pressure on a party to perform a contract are not enforceable. Such a provision is known as a “penalty clause”. However, there is no simple test for determining whether a particular clause will be considered a penalty and you have to look at each in context.

The facts of the case

In the E-Nik case, the Department for Communities and Local Government engaged external IT consultants, E-Nick. The contract provided that the Department, “undertakes to purchase minimum of 500 days of Consultancy from the Supplier per year based on project requirement, additional days will be required once the purchased days have been exhausted”. (The judge noted that the language in the contract was not always “elegant”.)

A dispute arose over two invoices which E-Nik had raised even though the Department had not purchased the minimum “500 days of Consultancy”.

The judgment

One of the questions which the court had to consider was whether a “take or pay” clause (such as the one in this case) which effectively states that “even if these services aren’t actually supplied, you will pay for them anyway” amounted to a “penalty clause”.

Here, although the court considered that a “take or pay” clause could potentially be a penalty clause, it was not one in this case, as the clause was commercially justified and was not oppressive. E-Nik had to maintain the resources to provide the consultancy services as and when needed and the parties had negotiated the wording and had comparable bargaining power.

What you can do about this

With careful drafting, in practice, it is often possible to change an unenforceable penalty clause into a provision that produces the protections the contracting party is seeking and should be enforceable.

It is therefore important to take advice to make sure that, if the worst should happen, and the other side does not perform the service you require, you are able to rely on the relevant clauses in the contract.

To read the judgment of the E-Nik case, click here.

For more information on these issues please contact Ian McDonald or your usual Lewis Silkin contact.

Changes to TUPE – what’s on the cards?

Wed, 20 Feb 2013 17:29:00 Z

The Government has announced plans to reform “TUPE” – the Transfer of Undertakings (Protection of Employment) Regulations 2006. This article considers the implications of the proposed changes for anyone involved in negotiating business transfers and in particular the terms in relation to employees in asset purchase and business transfer agreements.

What’s TUPE?
TUPE is the regime under which, on a relevant transfer of an undertaking, all the transferor's employees assigned to the undertaking automatically transfer to the transferee, who inherits all rights, liabilities and obligations in relation to them.

Timings
First up – there’s no need for any immediate change to practice. The consultation on the proposals remains open until 11 April 2013, and amending legislation will only follow after that in a timetable as yet unspecified.

Benefits to purchasers in particular
When in force, however, a number of changes are likely to affect the course of transactions. They will be particularly welcomed by purchasers who envisage restructuring the acquired business:

The Government plans to allow a seller to rely on the purchaser’s economic, technical or organisational (ETO) reason to make dismissals before the transfer.

At present, parties often feel constrained in making pre-transfer dismissals due to the fact that they will almost certainly be automatically unfair. This change should allow the parties to agree that the seller will effect redundancies with confidence that the risks are much more limited.

More generally, it will be made easier to dismiss transferring employees and change their terms and conditions. Specifically, dismissals will only be automatically unfair, and changes to terms and conditions void, if the employee can show that they were “by reason” of the TUPE transfer as opposed to the present (broader) “connected with” the transfer test.

Purchasers often wish to harmonise employment contract terms with those of their existing workforce. The changes should give them greater freedom to do so, although caution will still be needed, as the consultation document acknowledges that giving carte blanche to all harmonisation would probably breach European law.

Smaller employers - the detail of who is a “smaller” employer is yet to be determined - will be able to inform and consult about the TUPE transfer directly with affected employees, as opposed to having to go through a process of arranging representative elections.

This should help to speed up the acquisition process for these employers.

The Government intends to allow any collective redundancy consultation conducted by the purchaser before acquisition to count towards the minimum 30 / 90 (soon to be 30 / 45) day collective consultation periods.

This should allow purchasers to move forward with restructuring at a faster pace. Allowing the purchaser access to the seller’s employees to start this process is likely to become a more important point for negotiation.

The Government plans to limit the period during which terms and conditions derived from collective agreements must be observed to one year following transfer; although it is also consulting over whether there should be a condition that any change after that time, which is by reason of the transfer, should make the terms no less favourable overall.

Nevertheless, where particularly onerous collective agreement terms are identified through due diligence, it should be possible to take a more robust approach to the longer term commercial implications of this.

What’s not changing?
The proposals are also marked by what the Government is not planning to change.

The Government has decided against changing the current default position whereby pre-transfer liabilities pass to the purchaser; it had mooted liability being shared by seller and purchaser on a “joint and several” basis.

The Government has concluded that the status quo – under which it is left to the parties to negotiate indemnities in respect of pre-transfer liabilities, or (in their absence) factor this into the price agreed – should remain intact.

The Government has also decided against any changes to the provisions in TUPE which apply where the seller is insolvent.

Other reforms
There are other “headline” changes that are of interest, but not so key to M&A deals:

The proposed repeal of the “service provision change” provisions is primarily of interest to those involved in change-of-service provider or outsourcing and insourcing situations.

In business / asset purchase situations, the traditional “transfer of undertaking” test isn’t changing and will remain of primary relevance.

The proposed repeal of the requirement for the transferor to provide “employee liability information” about the transferring employees 14 days before the transfer.

In most acquisitions, a prospective purchaser would undertake due diligence on the transferring employees long before 14 days before the date of any transfer, and negotiate appropriate warranty and indemnity protection in the agreement. This will remain the case.

For more information on these issues please contact Colin Leckey or your usual Lewis Silkin contact.

Agency workers - don't ignore them!

Wed, 20 Feb 2013 16:53:00 Z

Ignoring agency workers recently proved expensive for Barnet Council in a cautionary tale for other employers. A change in the law about informing and consulting on collective redundancies and TUPE now requires information to be supplied to staff representatives on the employer’s use of agency workers. This information includes the number of agency workers, the parts of the business which use them and the type of work they are carrying out.

In Unison v London Borough of Barnet (case no.3302128/2012, unreported), a case concerning two TUPE transfers and a collective redundancy consultation, Barnet didn’t provide any information on agency workers - though it did provide information and consult for other purposes. It was ordered to pay compensation of between 40 and 60 days' pay to staff affected.

Given that Barnet did not comply, it is unsurprising that it lost. What is surprising is the level of the award. In all three cases, there had been considerable consultation and information provided on other matters. In looking at the agency worker failure, the employment tribunal decided to start with the maximum award (13 weeks' pay) and work downwards looking at the extent to which there was a failure. In doing so, it does not seem to have taken account of the full picture - in particular, assessing the significance of the failure to provide agency worker information against the other information supplied and consultation that took place.

Providing information on agency workers could be useful in a collective redundancy because there may be opportunities to save permanent jobs by reducing the use of temps. But information must be provided even if it has no relevance in the particular circumstances. The obligation is to provide information across the employer's operation even if there are no agency workers in the part affected by the redundancy.

On a TUPE transfer, it would be unusual for information on agency workers to be relevant – the existence of agency workers would not normally have any implication for who transfers. In the Barnet case, the tribunal recognised this contrast and treated the TUPE failure as less serious than the collective redundancy failure.

Employers not wishing to end up in the same boat as Barnet could consider these practical points:

Do you know how many agency workers you use across your business? One of the aspects on which Barnet came unstuck was that it did not have reliable statistics. It had some information on how many agency worker days it was paying for. However, if it paid for 40 days, it did not know if these were accounted for by eight agency workers each doing a five-day week or 20 doing a two-day week.
On a TUPE transfer, the standard position is that the transferor will be the employer of the transferring employees and so it will be responsible for providing the information and consulting with representatives of the affected employees. In that case the information on agency workers that needs to be provided relates to the agency workers at the transferor’s workplace. However in a minority of circumstances the transferee’s own permanent staff may be affected (for example if the transferee is going to pool staff from both its existing and the transferring operation and make redundancies) such that information and consultation obligations are triggered for the transferee as well. In that situation the transferee would also need to provide agency worker information about the agency workers at its workplace to its own affected employees.
Ensure your systems can tell you not only the number of agency workers that you use, but the parts of the business in which they work and the type of work they are doing.
Provide the information even if it is completely irrelevant!

If it looks like a warranty and sounds like a warranty....it probably is a warranty

Wed, 20 Feb 2013 16:52:00 Z

In a recent battle in the High Court over contractual interpretation of a share purchase agreement, Mann J has held that the express warranties in that agreement were, in fact, just warranties and not representations. The buyer lost its claim for misrepresentation, which would have given it a higher level of damages.

The facts

A private equity funded buyer, Sycamore Bidco Limited, bought a majority stake in a company for £16.75 million. The share purchase agreement (SPA) contained a number of warranties relating to the accounts of the target company. Shortly after the purchase the buyer discovered a number of accounting errors in the warranted accounts and that the target was worth only £12 million.

The SPA contained an entire agreement clause, which excluded liability for representations that were not set out in the SPA, but did not exclude liability for representations in the SPA itself.

The buyer sued for misrepresentation as well as for breach of warranty, because the measure of damages in misrepresentation would have enabled it to recover the full £16.75 million it had paid. Breach of warranty would only have resulted in damages of £4.75 million, the difference between the purchase price and the value of the target company on the date of the purchase.

The judgment

The judge found that the sellers were in breach of warranty but there had been no misrepresentation on their part in the SPA. So he awarded the buyer the lower level of damages. Mann J made the following points:

There is a clear distinction in law between warranties and representations and those who drafted and negotiated the SPA would have been aware of this.
The words in the warranty provisions in the SPA were ones of warranty and not representation.
The disclosure letter made a distinction between representations and warranties and referred to them separately.
The limitation of liability clause did not refer to representations and so depriving the sellers of the protection of that clause in the event of misrepresentation could not have been the commercial intentions of the parties.
Representations are statements made to induce the buyer to enter into the contract and so by their nature are “pre-contract”. The timing doesn’t work if representations are only in the contract itself.

What about the Invertec case?

Whilst Mann J’s conclusions in this case do seem logical, they are not in line with another recent case, Invertec, on a similar point. In the Invertec case, Arnold J found that warranties contained in a contract amounted to representations of fact as to the state of the company in question at a certain time. The buyer in that case successfully argued that every new draft version of the warranties (so “pre-contract”) had been a representation.

Mann J chose not to distinguish this case from Invertec but instead said that he disagreed with the views of Arnold J in Invertec.

Conclusion – clear drafting

Whilst this case provides some guidance as to how a court would determine issues of contractual interpretation; it is not entirely conclusive given the opposite result in Invertec. The key point is to ensure that your drafting is clear. If you intend a warranty also to be actionable as a representation, use clear wording to achieve this. Conversely, if you wish to ensure that you don’t end up with a misrepresentation claim, remove representation wording and use a detailed and clear entire agreement clause to deal with this issue expressly.

Click here to read the judgment of Sycamore Bidco Limited v Breslin [2012] EWHC 3443 (CH).

Click here to read the judgment of the previous case referred to: Invertec Limited v De Mol Holding BV [2009] EWHC 2471 (Ch).

For more information on these issues please contact Louise Sargeant or your usual Lewis Silkin contact.

Political dismissals - unfair from day one?

Tue, 19 Feb 2013 17:30:00 Z

The Government has just announced plans to make some significant amendments to the Enterprise and Regulatory Reform Bill (ERRB), which is currently making its way through Parliament.

Protection from political dismissals

The most significant change is the proposal to remove the two year unfair dismissal qualifying period where the reason (or principal reason) for dismissal ‘is, or relates to, the employee's political opinions or affiliation’.

This measure follows the decision of the European Court of Human Rights in Redfearn v United Kingdom, which we have commented on previously. Mr Redfearn was dismissed due to his membership of the BNP, and the Court had ruled that the UK needed to take measures to protect all employees from dismissal on grounds of political opinion or affiliation. After speculation about what the Government would do with this ruling, it has confirmed that it will not appeal and is now taking steps to bring the law into line.

This change will allow employees to bring a claim if their dismissal is related to political opinion or affiliation, irrespective of length of service. This does not mean that such a dismissal will be regarded as automatically unfair. However, employers will need to show that any dismissal based on political opinion is for a fair reason, and falls within the range of reasonable responses. This is most likely to arise where political opinions or activities interfere with an employee’s ability to do their job.

As commented in our Knowledge update, this potentially creates a confusing exception to the current law on unfair dismissal. This protection would only be for dismissals, and would not apply to other treatment. This could leave the law in a muddle with no protection for an employee who is harassed and/or victimised on the basis of their political views. Alternatively, it could be argued that political opinions should be protected by the Equality Act as a “philosophical belief”, giving scope for a discrimination claim as well.

In practice, it seems unlikely that this provision will result in an influx of claims since political opinion dismissals will probably be quite rare and limited to certain areas such as the public sector. However, this is another route that can be tried by employees who do not have the required two years’ service to bring a standard unfair dismissal claim.

Whistleblowing and financial penalties

The other two key changes to the ERRB relate to whistleblowing and financial penalties.

Firstly, the requirement of “good faith” for a protected disclosure in whistleblowing cases will be partly removed. This change seems to be related to the existing provision in the ERRB that disclosures must be made in the “public interest”, which will limit the ability of employees to make claims about their own treatment. This does not involve a complete removal of the requirement of good faith, although a disclosure made in bad faith (such as purely for personal gain) will no longer be a bar to a whistleblowing claim. Instead, the amendment gives Employment Tribunals a new power to reduce compensation by up to 25% if a disclosure was not made in good faith.

The second amendment relates to the proposal that Tribunals should have power to levy a financial penalty on an employer who loses a claim. The new provision requires Tribunals to have regard to the employer’s ability to pay when ordering a financial penalty – much as they do at the moment with costs awards. The amendments have also clarified that the penalty is up to 50% of the award, but with a minimum of £100 and a maximum of £5,000.

Apparently more amendments have been tabled by the opposition and further changes are expected, so watch this space for even more new employment law...

“Back-to-work” schemes back on

Mon, 18 Feb 2013 16:43:00 Z

Issues around the Government’s unpaid work experience schemes regularly make headline news. Last week was no exception, with the result of the judicial review appeal brought by graduate Cait Reilly to challenge the legality of the schemes. The Court of Appeal’s decision that the schemes were unlawful has prompted a flurry of activity within Government to bring the existing legislation in line, and has turned the spotlight firmly back to the social and political issues surrounding unpaid work experience and internships.

We have commented before on the legal underpinnings of the schemes, and Ms Reilly’s failure at first instance to convince the High Court that the schemes were illegal. Ms Reilly and another Claimant, Jamieson Wilson, appealed that decision on a number of grounds.

The Court of Appeal focused on the Jobseeker’s Allowance (Employment, Skills and Enterprise Scheme) Regulations 2011 (the “Regulations”), under which the unpaid work schemes were established. The Court had to determine whether or not the Regulations complied with the enabling provision of the Jobseeker’s Act 1995 (the “Act”).

Last Tuesday, the Court unanimously found that they did not, and quashed the Regulations (the full judgment can be found here). The Court held that the Regulations failed to meet the legal requirements because they did not describe the schemes to which they applied. The detail of the schemes should have been laid before Parliament before being brought into force. However, the Court also made it clear that this case was “not about the social, economic, political or other merits” of the schemes.

Both sides were quick to claim the moral high ground. “Team Reilly” said the ruling highlighted the unfairness and lack of transparency in the implementation of the schemes, and pointed out that the Government would have to draw up fresh regulations before anyone else could be required to participate. The Government focused on the Court of Appeal’s backing, in principle, for jobseeker schemes. It also pointed to the finding that requiring jobseekers to participate in such schemes did not breach their human rights, which had been a key part of Ms Reilly’s and Mr Wilson’s arguments.

The decision left the door open for the Government to simply rectify the flaws in the Regulations by ensuring (subject to Parliamentary approval) that they describe the schemes to which they apply, as required by the Act. Iain Duncan-Smith has done exactly that, and immediately issued new Regulations (the Jobseeker’s Allowance (Schemes for Assisting Persons to Obtain Employment) Regulations 2013) which correct the technical errors in the original Regulations, and mean that the back-to-work schemes can continue.

What this means for the thousands of people whose JSA payments had been stopped under the previous Regulations is unclear – although the DWP is now looking at finding ways to avoid paying backdated jobseeker’s allowance to those who had refused to take part in the schemes in the past.

As far as employers are concerned, the Government’s unpaid work schemes can now continue. Meanwhile, employers not involved in the scheme are required to pay all workers at least the national minimum wage. Arguably then, little has changed in practice.

However, the ruling is undoubtedly embarrassing for the Government and has provided yet another opportunity for critics of unpaid work schemes to air their views on the importance of paying workers fairly. A serious concern to employers involved in the schemes is the negative publicity which has come about as a result of these legal challenges. While organisations that have signed up have done so for legitimate reasons, and often with the intention of helping unemployed people, they have been portrayed as Dickensian industrialists hunting down cheap sources of labour. The future of such schemes may depend more on the willingness of employers to participate than it will on the outcome of any further legal challenges. The media storm also serves as an important reminder to all employers, whether involved in the Government’s work schemes or not, of the potential public relations and commercial costs of taking on unpaid interns.

The line between unpaid work experience and paid work is becoming increasingly blurred. Driven at least in part due to the high level of youth unemployment, in order to gain experience, people often have to work for free or very little. The real challenge is to find ways of encouraging and enabling people to find employment without being seen to take advantage of their situation.

Ending the employment relationship: does ACAS have it all settled?

Mon, 18 Feb 2013 15:01:00 Z

As we previously reported, the Government’s response to its consultation on “Ending the Employment Relationship” set out its proposals to make pre-termination settlement discussions inadmissible in subsequent unfair dismissal claims, provided there is no “improper behaviour”. The new regime will protect these conversations from being referred to in a tribunal even where there is no current employment dispute and the employee is unaware of any problem (you can read our commentary on the response here).

ACAS has now launched its consultation on a new statutory Code of Practice which will underpin the Government’s plans. The main thrust of the Code as currently drafted is to try and flesh out what “improper behaviour” means. It also contains recommendations around the mechanics of making an offer.

The examples currently given in the Code of what might amount to improper behaviour draw on existing concepts of prohibited behaviour such as harassment, victimisation and discrimination, as well as physical assault or other criminal or “wrongful” behaviour. Reference to “wrongful” behaviour is no doubt intended as a sweep-up, but in practice is likely to be problematic as its meaning is unclear. The Code also proposes that “undue pressure” may fall within the concept of “improper behaviour” and while the Code suggests some examples, this is likely to be a difficult line to draw. Employers will, however, be reassured that the Code recognises that undue pressure may come from either party, so an employee who threatens to undermine an organisation’s reputation if it does not agree to the employee’s settlement proposals would not be covered.

Whilst many employers will welcome attempts to make settlement discussions easier, some aspects of the current proposals will prove challenging in practice. The existing law on “without prejudice” conversations will continue to apply. This protects discussions that take place in a genuine attempt to resolve an existing dispute between the employer and employee from being referred to in a tribunal, unless there is “unambiguous impropriety”. Having the two regimes running alongside each other will create an overlap in some cases. In particular, the difference in scope between the (wider) “improper behaviour” and the (narrower) “unambiguous impropriety” concepts, and which one applies in any given situation, is likely to be fertile ground for argument where settlement is not reached - and a distraction from the real issues.

The draft Code also deals with the mechanics of making an offer. It suggests that although a settlement offer can be made at any time during the employment relationship, without any process being followed, the reason for the offer should be given (e.g. performance or conduct). The Code proposes setting out settlement offers in writing and three template letters are included in the Code which could be used for unsatisfactory performance, conduct or attendance issues. Although these will no doubt be a welcome starting point for small and medium-sized employers, they are rather blunt instruments and are not suitable for more complex situations. For the sake of good employee relations, as well as ensuring adequate protection for themselves, we suspect many employers will still wish to take their own legal advice and draft tailored letters and agreements. The Code recommends giving employees “a reasonable period of time” to consider an offer (seven working days as a minimum) and allowing employees to be accompanied to any meeting at which settlement is discussed by a colleague or trade union representative.

Ultimately, the idea of an explanatory Code is sensible and the anticipated supplementary non-statutory guidance may resolve much of the detail. However, the Code injects rigidity into what is meant to be a fluid process (where fluidity has advantages for both sides). Layering the new law on the old is bound to make matters more, not less, complex (and therefore expensive and time-consuming), which unfortunately militates against the main objectives of the reform: a way to end employment amicably with certainty and simplicity.

The consultation closes on 9 April 2013.

ESMA Remuneration Guidelines for Alternative Investment Fund Managers

Mon, 18 Feb 2013 09:58:00 Z

The European Securities and Markets Authority (ESMA) has published its final guidelines on the implementation of the remuneration provisions under the Alternative Investment Fund Managers Directive (“Directive”).

The purpose of the remuneration requirements under the Directive is to curb excessive risk taking by Alternative Investment Fund Managers (“AIFMs”), the idea being that stronger governance of how fund managers are paid will ultimately lead to improved investor protection.

Who is affected?

The rules will apply to managers of alternative investment funds (AIFs) including hedge funds, private equity funds and real estate funds.

Subject to transitional provisions the rules will apply from 22 July 2013 to EU AIFMs and from 2015 to non-EU AIFMs who manage one or more EU AIFs and ultimately to non-EU AIFMS which market non-EU AIFs to EU investors.

ESMA have confirmed that the principle of proportionality could lead to certain firms being able to disapply certain requirements entirely.

What is required?

The governing body of each AIFM will be obliged to ensure that sound and prudent remuneration policies and structures exist and are not circumvented.

The guidelines apply to “Identified Staff” whose professional activities might have a material impact on the AIF’s risk profile. Identified Staff includes senior managers, risk takers, staff with control functions and any other staff receiving total remuneration that takes them into the same remuneration bracket as the aforementioned categories of staff.

Identified Staff will now also include staff of the entities to which portfolio management or risk management activities have been delegated by the AIFM if their professional activities have a material impact on the risk profiles of the AIF that the AIFM manages.

What is meant by “remuneration”?

The guidelines apply to all forms of payments or benefits paid by the AIFM, including any amount paid by the AIF itself and any transfer of units or shares of the AIF in exchange for professional services rendered by the Identified Staff. Remuneration also still includes carried interest.

Remuneration is either fixed (payments or benefits without consideration of any performance criteria) or variable (additional payments or benefits depending on performance or, in certain cases, other contractual criteria).

At least 50% of the variable remuneration must consist of equity or equity linked instruments in the relevant AIF(s) and must be subject to mandatory deferral requirements.

What happens next?

EU member states are required to implement the Directive in accordance with the guidelines.

The FSA has already issued its draft Remuneration Code for AIFMs and will now need to revise this in line with ESMA’s final guidelines in particular further clarity on the proportionality principle is expected.

What do you need to do?

AIFMs should review their remuneration structures including carried interest for Identified Staff to determine whether they are compliant with the ESMA guidelines or whether changes need to be made. If changes are necessary, AIFMs may need to consult with the Identified Staff to change their contractual terms and conditions accordingly, consider implementing an appropriate remuneration policy reflecting the requirements of the guidelines, and ensure that any current remuneration documentation is also updated appropriately.

A degree of discrimination

Fri, 15 Feb 2013 13:55:00 Z

It can often be difficult to assess whether introducing new practices or criteria in the workplace might amount to indirect discrimination. The recent decision in the long-running case of Homer v Chief Constable of West Yorkshire Police (which made its way up to the Supreme Court and back down to the employment tribunal), is an important reminder of the issues to bear in mind when considering whether any such changes can be justified.

After 30 years as a Police Constable with the West Yorkshire Police, Mr Homer switched to a legal adviser role in the Police National Legal Database (PNLD). Legal advisers needed a law degree or equivalent (which Mr Homer didn’t have), or “exceptional experience or skills in criminal law, combined with a lesser qualification in law” (which he did have).

PNLD experienced problems with recruitment and retention and, in 2005, it brought in better salaries that would increase at each level of a new formal career structure which it thought would help. To reach the third and final level, legal advisers would need a degree in law or a similar subject – exceptional experience was not enough.

Mr Homer was approaching 65 – then the default retirement age - and would not be able to get the law degree before retiring – which meant he could not reach the pay increase linked to level three. He argued that this was indirect discrimination, as the legal qualification requirement put people of his age at a disadvantage compared to younger legal advisers.

His case made its way up to the Supreme Court, which agreed there was, in principle, an arguable case for indirect discrimination (you can read more about the Supreme Court decision here). The case was sent back to the tribunal to decide whether the requirement was a proportionate means of reaching a legitimate aim – the so called ‘objective justification’ test.

The tribunal thought the PNLD’s aim of recruiting and retaining staff of an appropriate calibre was legitimate. Having a new grading structure was an appropriate and reasonably necessary way of achieving this aim. But insisting that existing legal advisers hold a law degree to get to the third level of pay was a step too far and was not justified. Mr Homer therefore won his claim for indirect discrimination.

Law degree not necessary...

The tribunal saw no problem with applying the new grading structure fully to new recruits but allowing existing staff to reach level three without a law degree. The PNLD had claimed making this distinction was too difficult and fraught with employee relations problems – but the tribunal thought the problems had been overstated. It made a comparison with providing a different pension scheme for new joiners when final salary pension schemes are closed down. There was also no evidence that PNLD’s client base insisted their legal advisers have a law degree, or that PNLD would lose people to competitors if an exception were made for existing staff.

The tribunal made clear it was not suggesting a special exception should be made just for Mr Homer (the only adviser without a law degree). Rather, it was saying that different requirements could have been applied to all existing staff compared to new recruits. Employers who grant privileges to employees in a protected group (e.g. older workers) risk directly discriminating against those outside the group.

The message

If you are introducing new requirements, don’t automatically rule out taking a different approach with your existing staff compared to new recruits, but always be mindful of discrimination. Consider your requirements carefully. What do you want to achieve? Will your approach achieve this? Could it have a discriminatory effect? Is there a less discriminatory way of reaching your goal? ‘Nice-to-have’s won’t cut it with the tribunal, so be sure your requirements are necessary and be ready to explain why.

When is a winding up petition an abuse of process?

Thu, 14 Feb 2013 13:22:00 Z

Where a winding up petition is presented for a purpose other than getting a company wound up (a collateral purpose) it is likely to be struck out as an abuse of process. However, in Ebbvale Ltd v Hosking (Bahamas) [2013] UKPC 1 a petition to wind up a company was upheld by the Privy Council, despite the fact that the creditor’s purpose in presenting the petition was, in part, linked to proceedings it was pursuing against the company in England.

Background

Hosking was trustee in bankruptcy for a Mr Michaelides. Following his appointment, Hosking commenced proceedings to establish the ownership of a property, which two days prior to Mr Michaelides’ bankruptcy had been transferred to two individuals and then subsequently to Ebbvale. Hosking believed the transactions were a sham and that Mr Michaelides remained the owner. The consideration was a bank loan of £450,000 secured by way of a purported mortgage over the property. The property was valued in excess of £700,000. Hosking reached a settlement with the bank requiring the bank to assign the debt of £450,000 and the purported mortgage over the property to the bankrupt estate. This left Ebbvale as the only defendant to the proceedings.
Hosking, as a creditor in respect of the assigned debt then commenced winding up proceedings against Ebbvale in the Bahamian courts. A winding up order was granted and affirmed on appeal. A liquidator was appointed over Ebbvale’s affairs.

Ebbvale then appealed to the Privy Council arguing that the liquidator’s approach and attitude to proceedings would mean it would be a weaker opponent in the defence of the English proceedings than it would have been under the control of the directors. Hosking stood to obtain an unfair advantage in the English proceedings and this purpose in bringing the petition meant the petition should be dismissed since it amounted to an abuse of process.

Decision

The court considered it to be in the best interests of Ebbvale and Hosking that a “professional decision” should be taken about “...the further conduct of Ebbvale’s defence [to the proceedings]...and about the terms of any compromise which it would be commercially sensible...to propose...”. Whilst accepting that Hosking’s purposes in petitioning were “intimately related” to the English proceedings, and obtaining the order would undoubtedly lead to a costs saving in the proceedings and consequently benefit Hosking in his capacity as claimant, the Privy Council held that the existence of that collateral purpose did not mean the petition was ultimately an abuse of process and dismissed the appeal.

Comment

When abuse of process on an application to wind up a company is alleged, a petitioning creditor’s purposes will be scrutinised. In Ebbvale the petitioner acknowledged that appointment of a liquidator, and the resulting change in approach to the English proceedings was one of the underlying purposes in presenting the petition. However, the winding up order would also be extremely advantageous to Hosking in his capacity as petitioning creditor in the Bahamas and that advantage was the other of his other purposes. Crucially, as Lord Wilson acknowledged, “it is not necessary that [this purpose] should have been his principal purpose”.
Therefore, if a petitioner presents an application to wind up a company, then providing that application is “...objectively, likely to be of substantial advantage to him in his capacity as petitioning creditor...” the court will not find the proceedings to constitute an abuse of process, even where other collateral purposes might exist in tandem.

For more information contact Ben Ruggles or your usual Lewis Silkin contact.

Trade unions - do I recognise you?

Thu, 14 Feb 2013 10:56:00 Z

In a recent decision, the Central Arbitration Committee (CAC) considered the scope of the law in the UK on trade union recognition and found that aspects of the recognition machinery did not properly give effect to the right to freedom of assembly in Article 11 of the European Convention on Human Rights (ECHR).

The Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) sets out the statutory provisions for trade union recognition. If a successful application for recognition is made, the employer must recognise that union for the purposes of collective bargaining on pay, bonus and holiday (“the core topics”). However, it was assumed that a trade union cannot make a request for statutory recognition if the employer already has a collective agreement in place for the relevant bargaining unit, entitling the union to conduct collective bargaining on that unit’s behalf.

In this case, Boots Management Services (Boots) had a long standing relationship with a listed trade union, Boots Pharmaceuticals Association (BPA). Although there was evidence of consultation between the parties over the years (primarily concerning limited matters such as the machinery for consultation and facilities of officials), BPA was not an independent trade union and had never been recognised by Boots for the purposes of collective bargaining on terms and conditions of employment.

The Pharmacists Defence Association (the Union) became frustrated by BPA’s ineffectual approach and applied to Boots for formal recognition. In what seems to have been a conscious act to block the Union’s attempts at recognition, Boots stalled the talks with the Union whilst swiftly moving to formally recognise BPA and conclude a collective agreement. This agreement preserved the nature of their current relationship and the limited rights to collective bargaining (and specifically excluded any bargaining or negotiation rights on the core topics).

The Union subsequently proceeded with its application for recognition to the CAC. It argued it was not prevented from making a request for statutory recognition because of the limited nature of the collective bargaining rights in the existing collective agreement, which failed to give effect to the essential requirements of Article 11 ECHR for workers to join trade unions to protect their interests through collective bargaining.

The CAC agreed. Although the limited collective bargaining rights satisfied the requirements of TULRCA on a literal reading, the effect was to deny employees the opportunity of having an independent trade union bargaining collectively on their behalf in relation to their terms of employment.

By reading in wording to TULRCA, the CAC has made it clear that any collective agreement which an employer enters into with a trade union must include the right to collective bargaining on the core topics, or else the door is left wide open for an additional (and perhaps less friendly union) to apply for statutory recognition. Any employers who have already entered into a collective agreement should also carefully check its wording to ensure it affords the right to collective bargaining on the core topics.

Daylight snobbery - what to do about socio-economic discrimination?

Thu, 14 Feb 2013 09:55:00 Z

“Ski holidays for Shazza and Kev, not just Hugo, Spencer, Mille and Binky”, promises a recent advert by Direct Ski. The message is clear – their trips are affordable whatever your position in society. (Hugo, Spencer, Millie and Binky are, apparently, the über-posh participants of TV dramality show Made in Chelsea, in case you didn’t know...)

Contrast the approach of another travel firm, Activities Abroad. A few years ago, it promoted “chav-free holidays”, listing names likely to be encountered on their trips (e.g. Charlotte, Alice, James, Charles) and others rather less likely (e.g. Britney, Chardonnay, Wayne, Dazza).

Both ads, in their different ways, highlight a continuing British obsession with the class system (as satirised in this classic sketch). Despite Direct Ski’s more enlightened marketing policy, it would probably be a mistake to assume it represents a general shift in attitudes towards a utopian, “classless society”. Studies, polls and reports have repeatedly shown that people’s social standing determines the way others judge them.

Arbitrary bias and stereotyping based on social status is often entrenched in minds and manifested in workplaces. The way employees and job applicants speak, their family background, the school or university they attended and even their food preferences, can play a role in how they are perceived and treated by bosses and colleagues.

Given that the Government says there are economic benefits that could come from increasing socio economic diversity, why, then, has there been no serious attempt to legislate against class discrimination in the workplace? Unequal treatment on other grounds such as race, gender, disability, age, sexual orientation and so on has been outlawed – why not class?

There was a significant nod in that direction by the previous Labour government when it enacted section 1 of the Equality Act 2010, a new duty on public sector bodies to address socio-economic disadvantage when making strategic decisions. The current Government, by contrast, seems intent on repealing it altogether.

In truth, there would be serious difficulties in seeking to enact a legal right to challenge class discrimination. The whole notion of “class” is a slippery concept to define. While it is relatively straightforward to draw distinctions between people for the purposes of the current protected characteristics – black/white, male/female, old/young etc – this cannot easily be done with class. As mentioned above, it encompasses myriad constituent factors such as personal wealth, name, education and speech. Trying to frame social class as an overarching protected characteristic would prove unworkable.

Evidence from abroad suggests this might be the case. The European Convention on Human Rights covers discrimination on grounds of “social origin” and “property, birth or other status”. Several countries have signed and ratified this section of the Convention (the UK has done neither) and enacted legislation prohibiting discrimination on grounds of social standing. Yet claims of this nature appear to be extremely rare. This could be explained by those countries having less divided and class-obsessed cultures than our own, but more likely it’s because the laws don’t work.

That’s not to say there isn’t a strong case for finding ways to address the scourge of socio-economic inequality in the UK. The issue is clearly on the backburner under the present Government. But, if we’re really serious about boosting social mobility and fostering a fair, inclusive and meritocratic society, socio-economic discrimination is an issue that people should be bovvered about, innit?

Changes to Judicial Review - implications for planning

Wed, 13 Feb 2013 16:53:00 Z

The Prime Minister claimed last year that applications for judicial review hamper economic growth, and that many such applications are "completely pointless". As a result, the government has been consulting on plans to reform the judicial review process (across the board, not just in respect of planning cases) to (it hopes) minimise the number of allegedly frivolous applications.

Judicial review provides the route for the public to challenge the decision of a body exercising public functions (a local authority for example). The permission of the High Court must first be sought, before the claim can proceed in full.

Three principal reforms are proposed to the process – relating to time limits, procedure and fees. The plan is to:

Reduce the time within which a judicial review permission application must be brought from (generally speaking) three months to six weeks for planning related claims;
Reduce the number of times an unsuccessful application for permission can be repeated; and
Increase the fees for judicial review applications and hearings.

The possibility of a challenge can hang over a development scheme like the sword of Damocles, and developers will be relieved that opportunities to challenge may be restricted by these proposals. In addition, if the time spent considering frivolous cases is reduced, the Court will be able to deal with the claims that do proceed far more swiftly.

So far, so good. However, the proposals have been criticised, the principal objection being the Government’s failure to demonstrate with particular rigour that judicial review presents a significant impediment to economic progress. The Government notes, for instance, that far more judicial review applications are made than are eventually granted permission, and the 2011 figures do indeed support that - 7,600 applications for permission to bring a claim were made, but only 1,200 were granted. Looking at planning cases alone, however, the UK Constitutional Law Group found there were only 169 planning related applications for permission between January and November 2012, of which 30 went to a final hearing. Planning cases are, in truth, only a small proportion of the overall judicial review picture.

That notwithstanding, land development requires hefty investment. Judicial review proceedings can cause severe delay to a scheme, with a commensurate increase to the cost of a project, which might ultimately impact on the viability of the project itself.

A similar article will be published in Waste Planning Magazine.

For more information on these issues please contact Judith Damerell or your usual Lewis Silkin contact.

Boundary Disputes

Wed, 13 Feb 2013 16:49:00 Z

When we are approached by landowners in need of advice about boundary disputes, it can be particularly difficult to resolve, especially when emotions run high. Less than two years ago, Judge Barker QC stated during the four-day trial of ACCO Properties Limited v Severn that he did “not [...] accept that the days are gone when a party can litigate over a tiny strip of land”.

The ACCO Properties case helpfully summarised some of the principles to be applied when determining boundary disputes as follows:

The words used in a conveyance, supplemented by a conveyance plan, should be the starting point. It is important that the boundary be clear. Note that the title plans where the land is registered is seldom absolutely precise, and that Ordnance Survey plans are general guides only;
Although a boundary line can be determined by reference to a conveyance, other evidence could establish a different boundary (such as particular topographical features present at the time of the conveyance);
Evidence post-dating the conveyance may or may not be relevant and admissible depending on the circumstances, such as the parties’ subsequent conduct and any evidence showing a different boundary as a result of adverse possession. Site investigations and expert evidence from surveyors may also be admissible as evidence;
Boundary agreements do not have to be in writing in order to be legally binding, and indeed may be inferred or implied. (Nevertheless, it is always sensible to record such agreements in writing, preferably with a clear plan.)

While Judge Barker may well have recognised the possibility of litigating over a strip of land, he made clear that this would be “economic madness”, as litigation can be complex, costly and uncertain. Alternative dispute resolution, such as negotiating a settlement, is therefore far more preferable in these cases.

As always, however, prevention is better than cure. Taking a set of photographs of your property’s boundaries and dating those photographs may help should a dispute arise, and if you’re planning to erect a new wall, fence or plant a hedge, it’s a good idea to talk to the owners of neighbouring properties about it first.

For more information on these issues, please contact James Corbett or your usual Lewis Silkin contact.

Occupiers' Liability

Wed, 13 Feb 2013 16:34:00 Z

Have you questioned whether you are doing everything you should to keep clients, visitors, or members of the general public safe whilst they are on your premises? This could be as simple as ensuring there are no dangerous holes on your land, a stairway is adequately lit, or office cables are not positioned where an employee could trip over them.

Under the Occupiers’ Liability Act 1957, an occupier (which is someone with sufficient control over the premises) has a duty to take such care as is reasonable to ensure all lawful visitors are reasonably safe in using the premises for the purpose for which they were invited or permitted by the occupier to be there. Trespassers are also owed a duty by occupiers under the Occupiers' Liability Act 1984 but the duty owed is of a lower standard than that owed to lawful visitors under the 1957 Act.

There are consequences in not fulfilling your duty as an occupier; a breach could give rise to a private civil action against you or your company.

The facts and the relevant factors of each occupiers’ liability case will determine the outcome. These may include:

How obvious the risk was and the likely consequences;
Whether the occupier knew of the risk or ought reasonably to have known about it;
Whether the visitor was aware of the risk and the possible consequences; and
Whether the visitor should have been aware of the risk.

It is also important that occupiers protect themselves by taking out public liability insurance, as well as appointing someone, where appropriate, to manage such risk. But if you take all reasonable steps to address potential dangers on the premises, and remove or bring them to the attention of a visitor as much as you reasonably can, you will likely be able to establish that you are ensuring the visitors’ “reasonable” safety, in accordance with the 1957 Act.

For more information on these issues please contact James Corbett or your usual Lewis Silkin contact.