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Acceptance of Repair Means Acceptance of Goods The sale of goods by traders is covered by the Sale of Goods Act 1979, which requires that the goods sold must be as described, of satisfactory quality and fit for purpose. If these criteria are not met, the buyer has the right to reject them. However, the trader might offer to replace or repair the goods. Recently, the House of Lords heard an appeal, from the Scottish Court of Session, which required it to consider the position in which a trader delivered defective goods to the customer, who then agreed that they should be repaired. The question that arose was whether the customer could then reject the repaired goods. J & H Ritchie Ltd. had purchased a combination seed drill and harrow from Lloyd Ltd. When it was made ready for use by Ritchie, it was immediately obvious that the harrow was not working properly as it had excessive vibration. Ritchie stopped using the harrow and contacted Lloyd, which agreed to repair it. Having collected the machine and diagnosed the problem – two missing bearings – Lloyd ordered the parts and, when these arrived, it repaired the machine and informed Ritchie that it was ready for collection. This process took some weeks. Lloyd did not tell Ritchie the nature of the problem when requested to do so, merely replying that the equipment was repaired and that the repair had made it as good as new. Unhappy with this response, Ritchie rejected the machine. Lloyd commenced legal proceedings, arguing that Ritchie was bound by law to accept the repaired goods. Although Lord Brown was critical of Lloyd for its lack of candidness regarding the nature of the problem, in the view of the Lords, where a buyer receives goods which are defective and the defect is clear to buyer and seller, there is an implied duty on the part of the buyer to accept the goods and pay for them once the necessary repairs have been carried out. In the words of Lord Hope, “A buyer who…allows the seller to incur the expense of repair is under an implied obligation to accept and pay for the goods once the repair has been carried out.” This judgment has clear implications for purchasers of goods who find them to be defective. If they agree to have the goods repaired, the right to reject them will normally be lost. Contact David Holt or advice on any contractual matter. Partner Note J & H Ritchie Ltd. v Lloyd Ltd. (Scotland) [2007] UKHL 9. See - http://www.publications.parliament.uk/pa/ld200607/ldjudgmt/jd070307/ritch-1.htm. Companies are increasingly making use of non-executive directors and external advisors who are not formally appointed as directors to their board but who act, in effect, as directors of the company. It is not always appreciated by non-executive appointees that where a person acts as a director – in the sense that their instructions or directions are normally acted upon by the company – they are for some purposes in the same legal position as ‘proper’ directors of the company. People in this position are known as ‘shadow directors’. Unfortunately for such people, danger lurks in shadow directorships because the main way in which their position resembles that of actual directors is that they can share the civil liabilities of other directors in the event of a corporate insolvency. This may lead to them being required to contribute funds to pay creditors of the company if it becomes insolvent. They also face the possibility of being disqualified from acting as a director, by the Department of Trade and Industry, where their conduct warrants such a ruling. If you are asked to be a non-executive director or to participate at the decision-making level of a company’s management as a consultant or advisor, take care – especially if the company is in financial difficulty. Recently, a shadow director of a company was ordered to repay over £850,000 plus compound interest after the company with which he was involved went into insolvent liquidation. “If you are operating at a senior level in a company and are in effect ‘part of the team’, you may be at risk, even though your name is not on the letterhead,” says David Holt. “Ignorance of one’s responsibilities is no defence.” Directors who fail to take actions to protect the interests of shareholders or who behave improperly can face significant penalties. In another recent case, a director who was aware of a fraud being repeatedly committed by a fellow director was banned from acting as a director for twelve years. In a third case, a director who misused a company credit card, took company property for his own use and committed a number of other improper acts had his civil evidence referred to the Director of Public Prosecutions with a view to criminal proceedings being brought. Partner Note Primlake Ltd v Matthews Associates [2006] All ER (D) 395. Reported in Accountancy, May 2007, p120. Secretary of State for Trade and Industry v Gee and another [2007] EWNC 350. Collidge v Freeport plc – reported in the Times, 27 May 2007. See - http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article1844543.ece. Director Counts Cost of Absence of Written Agreement Directors often advance their own money into the companies they direct, either as seed-corn capital or to tide the company over cash flow shortages. Where the company subsequently becomes insolvent, such cash injections normally rank equally with other creditors and in that case should receive the same treatment as the debts due to creditors in general. In such circumstances, a director who reimburses money they have advanced is creating a ‘preference’ over other creditors and may be ordered to repay the amounts withdrawn from the company. Recently, a director of a pub company was ordered to repay £28,000, which he had loaned to the company when it was unprofitable and in financial difficulties and then taken out again when the pub was subsequently sold. He had also authorised a payment of £5,000 to his co-director. Three months later, the pub company commenced a company voluntary arrangement (CVA). The administrator supervising the CVA entered into negotiations to recover the amounts and discussions were held between the administrator and the director at which the director was asked if he would be prepared to settle the claim against him for between £5,000 and £10,000. He made an offer to repay £5,000, but no formal agreement was made. In the absence of an agreement, the administrator was given leave by the court to claim the entire sum that had been paid to the director in preference to the other creditors plus the £5,000 paid preferentially to his co-director. Says David Holt, “Insolvencies typically involve a great deal of horse-trading and negotiation. Whilst it is important for directors of companies facing insolvency to make sure that their behaviour is proper, it is also important to make sure that any agreements with administrators, receivers or liquidators made during the administration of an insolvency are evidenced in writing.” Partner Note Re: Cityspan Ltd. [2007] All ER (D) 61. 4 April 2007. Implied Consent Exhausts Trade Mark Rights “A recent case should remind owners of trade mark rights to think carefully if they allow goods to be parallel imported into markets in which their rights are subject to exclusive distribution agreements,” says David Holt. In the EU, the law protects the owners of trade mark rights against parallel imports (also called grey imports). The Trade Mark Directive allows trade mark owners the exclusive right to use their registered marks in the course of trade. However, where consent is given by the owner of the trade mark for the ‘grey’ goods to be placed on the European market, that right is extinguished. The case involved a small consignment of Cuban cigars, which was confiscated by the Customs at the airport as counterfeit. The cigars were not counterfeit, but were cigars sold in Cuba for export under an arrangement the trade mark owner had with a local Cuban wholesaler. The Court of Appeal decided that the trading arrangements between the owner of the brand and the wholesaler were such that the importer had unequivocally demonstrated that the trade mark proprietor had impliedly renounced any intention to enforce its exclusive rights. Contact David Holt for advice on any aspect of IP law. Partner Note Mastercigars Direct Limited v Hunters & Frankau Limited & others. [2007] EWCA Civ 176. See http://www.bailii.org/ew/cases/EWCA/Civ/2007/176.html. Inducement to Break Contract Must be Deliberate Where one person induces another to breach a contract, the other party to that contract may have the right to claim for damages against both the person who has committed the breach of the contract and the person who induced them to do so. A company called Mainstream recently successfully sued two of its employees for breach of contract after they set up their own joint venture, with a Mr De Winter, and diverted development business away from their employer to the new business. Mr De Winter had supplied the finance for the new business. Mainstream then set about suing Mr De Winter for inducing its employees to breach their contracts with Mainstream. There was no doubt that the breach of contract could not have occurred had Mr De Winter not supplied the necessary funding. However, the House of Lords found that Mr De Winter was not to blame. Recognising the potential for a conflict of interest between the employees and Mainstream, he had sought and received assurances from the employees that there was no conflict. They had maintained that there was no conflict because Mainstream had been offered the development site but had refused it. That was not the case, but Mr De Winter was unaware of that. It was also relevant that he had supported a similar development by the employees a year earlier to which Mainstream had no objection. This case is important since it demonstrates that a claim for damages for inducing a breach of contract will only be successful where the breach is deliberate. To prove a case, it is necessary that there is a breach of contract, that the person procuring the breach knows they are procuring it and that the breach is an end in itself or is a means to an end. In practice, this decision may well make the defence of ‘ignorance of the consequences’ easier to sustain in similar cases. Partner Note Mainstream Properties Limited (Appellants) v Young and others and another (Respondents). UKHL, 2 May 2007. For further information contact David Holt The number of corporate failures fell sharply in the first three months of the year, according to Experian. 430 fewer corporate failures have occurred this year compared with the same period in 2006. However, 2006 set a record for corporate failures, with over 20,000 insolvencies in the year, so the number of businesses going to the wall is still substantial. The decline in insolvencies by sector was, for the most part, evenly spread, with most industries showing falls in the numbers of businesses instituting insolvency proceedings. However, there was a substantial rise in insolvencies (almost 15 per cent) in the leisure and hotels sector. It remains to be seen what the effect of recent and anticipated further increases in interest rates will be. With large numbers of recent takeover deals being underpinned by substantial borrowings, the possibility that failure rates may rise again should not be discounted. If you face insolvency issues, David Holt can advise you. Partner Note Source – Experian, 16 April 2007. For full details see http://press.experian.com/documents/showdoc.cfm?doc=2596. Landlocked Land – Lords Confirm No Right of Access The House of Lords has confirmed the 2006 decision of the Court of Appeal that when a piece of land is landlocked (i.e. has no right of access over adjoining land so cannot be lawfully accessed by its owner), there is no automatic right to have a right of way ‘of necessity’ over adjoining land. The case involved land which was bounded to the East and to the West by private land. To the North and South it was bounded by a piece of land and a highway respectively. Both of the latter pieces of land had been sold to the predecessor of the local authority which now owned them. The landlocked land had been retained by the original owner and the conveyance of the adjoining land which was sold did not reserve any right of access over it. When the landlocked land was subsequently sold, the company that bought it sought to obtain a ruling that it should be granted a right of way to its property over the land to the North, which would be necessary for the land to be developed. The local authority had previously indicated that planning permission for access to the highway would not be granted. In the view of the Court of Appeal, at the time the land was sold there had been no common intention that there should be a right of access across the land to the North. Accordingly a right of way of necessity should not be granted. The Lords confirmed this decision. “This case illustrates the importance of not making assumptions – especially over things as critical as access to land,” says David Holt. “You should always make sure that the essentials are in place before signing on the dotted line. Relying on the courts to put things right after the event is a very risky strategy.” Partner Note Adealon International Property Ltd. v Merton London Borough Council [2007] EWCA Civ 362. The UK Intellectual Property Office (previously known as the Patent Office) has launched a campaign to make small businesses aware of intellectual property (IP) issues, claiming that many firms lose out financially because they fail to protect their IP. It has published two new information booklets offering advice to small firms. A free IP e-newsletter is also on offer. These can be obtained from the Intellectual Property Office website at http://www.ipo.gov.uk/. Says David Holt, “IP can be of enormous value in today’s economy and firms should take all necessary steps to protect it and to ensure their IP ownership cannot be questioned. If your business depends on unique processes, inventions, designs or technologies for its success, or you have invested in creating brands, contact us to see what steps can be taken to protect your IP assets.” Partner Note The information booklets offering advice to small firms and the free IP e-newsletter can be obtained from the Intellectual Property Office website at http://www.ipo.gov.uk/. Revenue Face Promotion Costs Defeat It clearly irritates some tax inspectors in HM Revenue and Customs (HMRC) that business promotional expenditure can be in some way connected with an activity which is enjoyed by the management of the business. Such expenditure, when substantial, is frequently queried in tax investigations. In a recent case, HMRC took a taxpayer who runs a coach business to task over promotional expenditure claimed in his accounts as a business expense. The coach operator had purchased a rally car which was painted in his business livery and which he used in rallying competitions, claiming the cost as a deduction from business profits. HMRC attacked the deduction claim on the grounds that the expenditure was not ‘wholly and exclusively’ for the purposes of the business. The Special Commissioners, however, found that the purpose of the expenditure was the promotion of the business and the expenditure was therefore allowable. It remains to be seen whether HMRC will appeal the decision, which on the face of it seems lenient. If not appealed, it represents a slight shifting of the goalposts, with regard to this type of expenditure, in favour of the taxpayer. Partner Note McQueen v Revenue and Customs [2007] UKSPC SPC00061. For further information contact David Holt The Equality Act (Sexual Orientation) Regulations Sexual orientation is defined as an individual’s sexual orientation towards people of the same sex, people of the opposite sex or people of both sexes. Protection therefore applies to everyone – lesbians, gay men, heterosexuals or bisexuals. The Regulations prohibit direct and indirect discrimination and cover:
Employers should note that for the purposes of the Regulations, anything done by an employee in the course of their employment will be treated as done by the employer also, whether or not the employer knows about or approves of the act. In such circumstances an employer will have to prove that such steps as were ‘reasonably practicable’ were taken to prevent the employee from doing the act, or acts of that kind, in the course of his or her employment. If you would like advice on any aspect of the Equality Act (Sexual Orientation) Regulations 2007, please contact David Holt. Partner Note The Regulations can be found at http://www.opsi.gov.uk/si/si2007/20071263.htm. What is an Associated Company? One aim of UK tax law is to prevent the minimising of tax liabilities by the artificial splitting of businesses in a way which allows a lower level of tax to apply because of the difference in tax rates applying to lower levels of profit compared with higher ones. A company which makes a profit of £300,000 or less currently pays Corporation Tax (CT) at 20 per cent. Above that level of profit, the CT rate is 32.5 per cent, up to the level (£1.5m) at which the ‘full’ rate of CT (currently 30 per cent) is paid. There is ‘marginal relief’ applied where the profits are above £300,000, but below £1.5m, but even after the application of the marginal relief, the effective rate of tax is well above 20 per cent. If it were possible to split the profits between two companies, so that each had profits below £300,000, both could pay the lower rate of CT. The principal legislation designed to prevent this is the legislation dealing with ‘associated companies’. Companies become associated, in essence, when they are under the control of people who are associated. This control may be more illusory than real, as what happens is that the degree of the control which the associates have separately is added together to ascertain the degree of control they would have if they acted in concert and the ‘combined’ level of control is deemed to apply. So, for instance, three associates who owned ten per cent, 20 per cent and 22 per cent of the voting shares of a company would be deemed to control it as together they control 52 per cent. There exists a complex series of rules which determine whether companies are ‘associated’ for CT purposes. Where they are, the practical effect is that the ‘small company’ threshold for profits is reduced, so that a company with associates may end up paying a higher rate of CT. These rules are very widely drafted and can apply in some surprising cases. Associates include:
One practical effect of these rules is that if you decide to start a series of companies to do different things, you must be very careful indeed. In many cases, especially if it is likely that losses might be incurred by one or more business companies, a group structure might be preferable. Also, if you are joining a partnership and you and any of your partners have outside business interests, it may be worth checking that you do not inadvertently create an unwelcome tax position for a company in which you hold shares. Fortunately, an extra-statutory concession exists which can disapply the associate company rules in cases in which there is ‘no substantial commercial trading interdependence’. Corporate tax law can be a highly complex matter – for advice on all tax planning matters, contact David Holt. Partner Note See ICTA 1988 Ss 416 et seq. The extra statutory concession is ESC 9. There is a good library of articles on this topic in the tax section of www.accountingweb.co.uk. In Brief - Act Quickly or Count the Cost When taking legal action for recovery of a debt, it is important to act promptly – and not just because of the risk associated with having a debtor that is in financial trouble. In a recent case, a company sued another for non-payment of a debt more than a year after the adjudicator’s decision in a construction dispute. The judge hearing the case ruled in favour of the claimant company, but reduced its claim for interest due on the outstanding sum by 50 per cent for one year because of the delay in bringing the claim. Partner Note Claymore Services Ltd. v Nautilus Properties Ltd. [2007] EWHC 805 (TCC). For further Information David Holt In Brief - Energy Performance Certificates Builders and developers of commercial properties are reminded that the Energy Performance of Buildings Directive will apply to commercial buildings from 6 April 2008. The Directive will require Energy Performance Certificates (EPCs) to be prepared for all buildings which are to be subject to sale or rent, if they have a floor area of more than 500 square metres. New buildings will require an EPC before the certificate of completion will be issued. Where buildings are to be sold or let, the EPC must be made available to prospective purchasers or tenants. Partner Note For further information contact David Holt **** The information contained in this newsletter is intended for general guidance only. It provides useful information in a concise form and is not a substitute for obtaining professional advice. We respect your time online and your privacy. If you would not like to receive any further newsletters then please send an email to opt-out.newsletter@bwblegal.com with 'unsubscribe |
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