Archive for November, 2015
Thank you for taking a few minutes to look at this edition of the MH Update.
2015 is the 30th anniversary of the founding of Marriott Harrison, so it is appropriate first of all to say a big thank you to those of you who have supported us over those years. We have come a long way from the firm’s origins in Bedford Row and the genteel Georgian surroundings of 11/12 Great James Street. The strong personal ethos of the firm remains the same but at the same time we continue to grow and I am delighted to announce a number of new arrivals at the firm.
Tamar Halevy joined earlier in the year from Lewis Silkin as a partner in the litigation department. Tamar now runs that group in place of Peter Curnock who has now retired. Peter has been a tower of strength for the firm for over 25 years. We will miss his advice and his good humour and we wish him the very best.
Brett Israel joined the partnership from Wragge Lawrence Graham during the summer. Brett’s practice is in debt finance and restructuring so this will help to extend the capability of the corporate group in those areas.
More recently Kit Stenning, Andrew Williamson, Nils Reid, Calum Robinson and Deirdre O’Neill have joined from McClure Naismith. They are all part of the corporate group working on M&A, corporate finance and IPOs. Jim Mackie also joined from McClure Naismith as a consultant in the litigation department.
We wish them all welcome and I hope that you will have the chance to meet them before long.
I cannot close without mentioning that this is the first publication of the MH Update since Duncan Innes died. He was a partner in the firm for over 20 years and is much missed. A large contingent from the firm and many of his other friends, which included many whose friendship stems from his work, attended his funeral.
I hope that you find some interesting reading in the notes below. If you have any questions about them please do contact the authors or if there is anything else you would like to discuss please get in touch with me or with your usual contact person in the firm.
The recent Court of Appeal decision Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd  EWCA Civ 839 considered how to interpret an indemnity clause in a sale and purchase agreement, overturning the High Court decision. The Court examined its role in interpreting a contract between parties where the language was capable of having more than one meaning, finding that it is not for the courts to improve a party’s bad bargain where it would undermine the importance of the natural language used.
In April 2010 Capita Insurance Services Ltd (“Capita”) acquired the entire issued share capital of Sureterm Direct Ltd (“Company”), an insurance broker, from certain sellers (“Sellers”), including the appellant. The sale and purchase agreement (“SPA”) contained a set of warranties which one would expect in such a transaction and the following indemnity from the Sellers to Capita (numbering and underline added for emphasis):
“The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against (1) all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and (2) all fines, compensation or remedial action or payments imposed on or required to be made by the Company (A) following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person (B) and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.”
Following the acquisition, Capita discovered that insurance mis-selling had occurred and reported this to the FSA (now Financial Conduct Authority), as was their obligation to do. They agreed with the FSA to a remediation exercise and to pay compensation to those customers affected by the mis-selling.
Capita brought a claim against the Sellers under the indemnity for approximately £2.5 million as a result of the exercise. The issue in dispute was whether the indemnity covered losses where Capita or the Company had self-referred to the FSA, rather than a claim or complaint being lodged by a customer. The High Court judgment helpfully divided the indemnity clause into sections (1), (2), (A) and (B), as noted above. Capita claimed that the indemnity was applicable in the circumstances because, under its interpretation of the different parts of the indemnity, only (2) (fines) applied to (A) (complaints to the FSA), which meant that (1) (losses) did not need to be connected to (A) (complaints to the FSA) and could simply be connected to (B) (pertaining to mis-selling pre-Completion). The High Court agreed with Capita’s interpretation.
On appeal, the Court of Appeal reversed the decision and found in favour of Mr Wood, on the following basis:
- It was necessary to look at the structure of the indemnity in its original form, read as a whole. The most natural reading was that it created an indemnity against two types of loss: those arriving from actions, claims, etc, and those arriving from fines, compensation, remedial action or payments, both of which applied to (A) and (B). Accordingly, any indemnifiable loss had to either arise from a claim against the Company (1) or a complaint registered with the FSA (2).
- Applying Capita’s interpretation would render the indemnity incoherent, as pairing (1) and (B) (and deleting (2) and (A)) failed to specify any entity against which an action must be brought. While stressing that it was only a small pointer towards his conclusion, Christopher Clarke LJ agreed with Mr Twigger QC’s entertaining analysis (for Mr Wood) that if one applied the phrase “I like cats and dogs which are black and fluffy”, to the structure of the indemnity in question, the most unlikely construction would be Capita’s, which would lead to “(1) I like cats (B) which are fluffy and (2) dogs which are (A) black and (B) fluffy”.
- It rejected the High Court’s conclusion that there was no good commercial reason to exclude the indemnity for loss caused by a self-referral to the FSA. Capita had other means of redress under the warranties covering FSA compliance; the fact that the indemnity was unlimited by time or financial liability meant that it was not surprising that its scope should be limited. In addition, it was not the court’s role to improve a deal which had been badly negotiated or drafted by Capita.
The decision highlights the broad principles of the interpretation rules which the courts will apply. It is not enough merely to rely on the assumed business common sense of a transaction, as two parties may have differing views as to what amounts to common sense. As a court will not always be aware of the parties’ intentions at the time of entering into a contract, it must assume that compromises may have been made, or that a party may have negotiated or drafted poorly. The courts will seek to find a balance between the indications given by the language and the implications of the rival constructions. As ever clear drafting, both in language and structure, is essential – whether regarding cats, dogs or otherwise.
The case of Portsmouth City Council v Ensign Highways Ltd  EWHC 1969 (TCC) considered whether a duty to act in good faith could be implied into the Council’s dealings with its service provider (Ensign).
The parties entered into a long term PFI contract for highway maintenance on 30 July 2004. Schedule 17 to the Contract set out certain Default Events for which service points could be awarded and a “Maximum Event Value” against each Default Event. The Council could issue warning notices, subject Ensign to closer scrutiny and ultimately terminate the contract if the total number of service points awarded passed a certain threshold in any 12 month period (150, 200 and 250 respectively).
Initially the Council operated on the basis that each Maximum Event Value figure in Schedule 17 was the upper limit of a range that could be awarded for the relevant Default Event. The Council would therefore consider the gravity of the breach when assessing how many service points should be awarded and informed Ensign on a monthly basis.
In 2012, following a number of cuts in local authority funding the Council started awarding Ensign with the maximum value of service points for every Default Event, refusing to communicate with Ensign in relation to breaches, finding breaches that Ensign might find difficult to remedy and awarding large numbers of Service Points at random intervals.
In June 2014 Ensign notified the Council that it intended to refer the dispute about the award of service points to expert determination in accordance with the terms of the Contract. It was Ensign’s assertion that the Council were deliberately trying to make satisfactory performance of the Contract difficult for Ensign. The expert concluded that the Council had acted in bad faith, without mutual co-operation and unfairly. The expert concluded that Ensign was, in general, delivering the required service but that the Contract did not provide any means of achieving long term improvements.
The Council commenced legal proceedings seeking various declarations relating to the performance of its obligations under the Contract. The key issues in dispute were:
- whether the Maximum Event Values represented the upper limit of a range of service points that could be awarded for a particular Default Event or were they fixed “tariffs” to be applied irrespective of the gravity of the breach in question;
- whether the duty to act in good faith set out in one clause of the Contract (which referred specifically to the parties obligations to secure continuous improvement and best value) extended to the Council’s obligations in relation to the award of service points under a different clause ; and
- if the duty to act in good faith did not extend to the award of service points, whether a term should be implied to that effect.
Edwards-Stuart J observed that failure of the duties under the Contract could take many forms and that it was therefore logical that parties build in some flexibility to the award of service points. He concluded that the word “maximum” had a very clear meaning – namely, the upper limit of a range and that the numbers in Schedule 17 could not therefore be fixed “tariffs” to be applied irrespective of the gravity of the breach.
As to the extent of the duty of good faith, the Judge stated that English law does not usually imply such a duty into commercial contracts.
The Judge, however, concluded that the Council was subject to an implied term when assessing the number of Service Points to be awarded under the Contract to act honestly and on proper grounds and not in a manner that is arbitrary, irrational or capricious.”
There are two main points to take away from this case:
- A duty to act in good faith set out in relation to a specific obligation will not imply that duty against other clauses within the same agreement;
- Whilst English law does not recognise an overriding duty to act in good faith there exists an implied term that a party must act in a manner that is not arbitrary, irrational or capricious when exercising a contractual right of discretion.
In the recent case Jetivia SA and another v Bilta (UK) Ltd  UKSC 23 (“Jetivia v Bilta”) the Supreme Court considered the application of the illegality defence.
Through its liquidators, an insolvent English company, Bilta (UK) Limited (“Bilta”), brought claims against its directors for unlawful means conspiracy involving them breaching their fiduciary duties and against a Swiss company, Jetivia SA (“Jetivia”) and its sole French director for dishonestly assisting them. Jetivia and its directors applied to strike out Bilta’s claim on the basis of the “illegality defence”, the principle that the courts will not assist a claimant whose claim is only possible due to the claimant’s own illegal action.
The liquidators also brought a claim under the fraudulent trading provisions of section 213 of the Insolvency Act 1986 against the directors, Jetivia and its sole French director. Jetivia claimed that section 213 did not have extra territorial effect. The application was dismissed by both the High Court and the Court of Appeal. Jetivia and its directors appealed to the Supreme Court.
Facts of the Case
Bilta was alleged to have been the vehicle for a VAT fraud involving a carbon emissions credit scheme. The liquidators alleged that Bilta’s two directors had breached their fiduciary duties to Bilta by causing Bilta to enter into a number of fraudulent transactions with third parties, including Jetivia, and therefore had conspired to injure Bilta.
In relying on the illegality defence to protect them from the claim, the directors and Jetivia argued that Bilta, through its directors, was a party to the illegality because any knowledge of the directors should be treated as though it was that of Bilta. If so then Bilta could quite properly bring a claim against them and there would be no illegality defence.
The Decision in Jetivia v Bilta
The Court unanimously held that section 213 has extra-territorial effect. The context of section 213 is the winding-up of a company registered in Great Britain, but the effect of such a winding up order is worldwide. It was difficult to see how the provisions of section 213 could achieve their object if their effect was confined to the UK.
In relation to the illegality defence the Court held that it was unjust and absurd to suggest that the answer to a claim for breach of a director’s duty could lie in attributing to a corporation the very mischief by which the director had damaged the company.
Lord Neuberger said in summary that the knowledge of the wrong-doing could not be attributed to the company in defence of a claim brought against the directors by the company’s auditors (or by the company itself). This was the case even if the directors were the only directors and shareholders of the company, and where the wrong-doing or knowledge of the directors might be attributed to the company were the proceedings of a different nature.
What Jetivia v Bilta means for Directors
Jetivia v Bilta makes it clear that the defence of illegality will not always be available to protect unscrupulous directors in claims brought against them by the company. This is because there remain circumstances where the director’s knowledge will be attributed to the company. In particular the defence is unavailable in the context of claims by or against a third party or where there are no innocent directors or shareholders and the controlling mind and will of the company is the same person as the directors.
That section 213 was held to have extra-territorial effect is perhaps unsurprising. In reality this will mean that directors residing in foreign jurisdictions will not be able to raise their foreign residency in defence.
Directors who find themselves the subject of such claims by companies will find it harder to raise the illegality defence. It is therefore now more important than ever for directors to carefully consider their duties and responsibilities; in particular the duty to promote the success of the company under section 172 of the Companies Act 2006.
The Supreme Court also indicated in Jetivia v Bilta that now is the time for a fuller analysis of the scope of the illegality defence. Jetivia v Bilta was held to be the time but not the place for such discussion but we await the next opportunity for the Courts to consider this most intriguing and technical of defences.
The case of Swynson Limited v Lowick Rose LLP  EWCA Civ 629 on appeal to the Court of Appeal concerned an amount of damages recoverable by a lender from a negligent firm of accountants which failed to perform a proper exercise of due diligence on the borrower to whom monies were lent on reliance on that negligent advice. The loan was repaid by using money lent to the borrower by the owner of the lending company. At first instance the High Court held that repayment was a collateral matter which did not go to reduce the damages recoverable by the lender from the negligent accountants. The appeal concerned, amongst other matters, whether damages due for that negligence could be reduced by “avoided loss”. The avoided loss came about through the repayment to the borrower of the two initial loans through the issue of a third refinancing loan from the borrower’s owner undertaken principally for tax reasons.
A majority of the Court of Appeal held that the repayments should not be brought into account when assessing damages against the negligent accountants. The accountancy firm would remain fully liable for its negligence, despite the repayment of the loans. The repayment by the owner of the borrower was “res inter alios acta” (acts between parties may not adversely affect the rights of others) and accordingly did not reduce the lender’s rights to recover damages.
Facts – abridged
The appeal concerned loans of £15m given in 2006 and £1.25m given in 2007 by Swynson Limited (“Swynson”) to Evo Medical Solutions Limited (“EMSL”). Central to the appeal was Mr Michael Hunt, an indirect owner of Swynson, who became a majority shareholder of EMSL in 2008 due to his involvement in the refinancing of EMSL.
On granting a loan to EMSL in 2006, Swynson relied on negligent due diligence undertaken by Lowick Rose LLP (at the time called Hurst Morrison Thomson (“HMT”)). HMT failed to update Swynson on a $3-$4m adverse difference between EMSL’s actual and forecast working capital. On the information that EMSL would collapse without extra funding, Mr Hunt caused Swynson to provide a further £1.25m loan to EMSL in 2007. As the loans became due for repayment, Mr Hunt himself provided a further loan in 2008 to help EMSL refinance the 2006 and 2007 loans. Swynson and Mr Hunt sued HMT for damages in negligence, HMT argued (amongst other matters) that by reason of Mr Hunt’s 2008 refinancing, Swyson had suffered no loss in respect of the 2006 and 2007 loans. The High Court held, amongst other things, that the 2008 partial refinancing was res inter alios acta and did not amount to reduce Swynson’s damages. HMT appealed this (and other matters). The appeal was dismissed by a majority of the Court of Appeal.
Longmore LJ dismissed the appeal, stating that avoided loss from the 2008 refinancing should not be taken into account in assessing damages. It was held that the avoided loss:
- Did not arise as collateral to the accountancy firm’s negligent advice, so would not be taken into account in Swynson’s claim for damages;
- Arose as a consequence of the breach, however, would not be taken into account and considered in the award of damages, as it was not a loan made in the ordinary course of business. The loan represented a worthless debt, which meant EMSL could not use the refinancing to procure business, in the ordinary sense;
- Came about as a result of the financial relationship of Mr Hunt to both Swynson and EMSL. Damages would not be reduced as the Court of Appeal did not feel it just for the accountancy firm to benefit as a result.
The decision in this case was made with the position of Mr Hunt in mind despite his not being a successful party to the appeal. The Court of Appeal tried to find a solution to make good Mr Hunt and Swynson and has done so with disregard to, as it put it, “technicalities” or which some would call the authorities. The judgment contains a very useful summary of the law on avoided loss then does its best to work its way around it. It nevertheless does provide (albeit very fact specific) guidance for claimants who fail to take or who are unable to take steps to mitigate their losses, but still nevertheless avoid loss as a result of the acts of third parties. The decision highlights the importance of considering the effects of action taken by third parties in relation to loss experienced by a claimant and the nature of those actions – whether the avoided loss arises by virtue of circumstances which are collateral to the breach of contract (eg an insurance payment, in which case the avoided loss need not be taken into account) or if the transaction giving rise to the avoided loss arises out of the consequences of the breach and in the ordinary course of business in which case it may be taken into account) eg where a supplier has failed to supply certain goods but the buyer ends up procuring better goods and a better economic bargain as a result. The judgment does not consider in detail the double recovery rule but that should always be borne in mind.
It may be the case that the defendant firm of accountants appeal this decision to the Supreme Court.
The recently reported decision of the High Court in IPSOS S.A. v Dentsu Aegis Network Limited (formerly Aegis Group plc)  EWHC 1171 (Comm) highlights the importance of ensuring that any provisions in a share sale and purchase agreement regarding giving notice of claims are followed precisely.
Under the terms of a sale and purchase agreement completed on 12 October 2011 (“the SPA”), Ipsos S.A. (“Ipsos”) purchased shares in various companies forming part of the same world-wide group from Dentsu Aegis Network Limited (“Aegis”).
In the SPA, Aegis had given a warranty that none of the companies faced potential claims from non-employees to the effect that that they should be treated as employees. Ipsos subsequently claimed that Aegis had breached that warranty because contract workers at a Brazilian company within the group were alleging that they should have been treated as employees but had not been. Ipsos issued proceedings against Aegis for breach of warranty. Aegis contended that there had not been a valid notice of claim and applied to the Court for the claim to be struck out.
The SPA contained two separate provisions dealing with notice of claims. The first provided that no warranty claim could be brought against Aegis unless Ipsos had given written notice of such a claim specifying in reasonable detail: (i) the matter which gave rise to the claim; (ii) the nature of the claim; and (iii) (so far as is reasonably practicable at the time of notification) the amount claimed. The time limit for giving notice of a warranty claim was two years from the date of completion. The second provision in the SPA related to third party claims and required Ipsos to notify Aegis of any claim it received from a third party which might result in a warranty claim.
On 14 August 2012, Ipsos wrote to Aegis giving notice of third party claims concerning the contract workers at the Brazilian company. This letter specifically stated that it was not a notice of a warranty claim. On 30 September 2013, Ipsos sent a further letter to Aegis giving further details of the third party claims. The letter did not state that a claim was being made for breach of warranty. Ipsos subsequently contended that, although it was not well drafted, this letter contained the information required under the SPA and was therefore sufficient to act as notice of a warranty claim.
In considering the matter, the Court stated that the starting point in such matters was that “the only true principles to be derived from the authorities is [sic] that every notification clause turns on its own wording”. However, there were said to be four broad propositions which derived from case law and which were potentially relevant to determining whether an alleged notice of claim satisfied the requirements under the notification clause. These were:
- The purpose of this type of provision is to ensure that sellers know in sufficiently formal terms that a claim for breach of warranty is to be made, so that financial provision can be made for it. Such a purpose is not served if the notice is uninformative or unclear.
- In construing any such notice the question is how it would be understood by a reasonable recipient with knowledge of the context in which it was sent.
- The notice must specify that a claim is actually being made rather than indicating the possibility that a claim may yet be made.
- The notice must specify any such matters which it is required to specify.
The Court held that the second letter from Ipsos failed to satisfy the above points in that (a) a reasonable recipient with knowledge of the previous correspondence and the context would not have understood it to be a claim notice; (b) there was no reference in the letter to a claim notice or any statement of a claim for damages for breach of warranty; (c) the letter did not specify “the matter which gives rise to the claim” as there was no attempt to specify the underlying facts, events or circumstances; and (d) the letter did not specify “the nature of the claim” as there was no real attempt to identify the form and substance of the claim. As such, the Court held that no claim notice in respect of the claim had been given and the claim was therefore time-barred.
This case demonstrates that in pursuing any claim it is vital to take careful note of any provisions specifying the form which a notice of claim must take. A failure to meet these requirements and set out the necessary details in the correct form at the outset may result in a claim becoming time-barred and the loss of the ability to bring a claim at all.
Where two businesses contract with each other on the standard terms of business of one of them, any exclusions or limitations of liability contained in those standard terms must be “reasonable” in order to be effective, pursuant to the Unfair Contract Terms Act 1977 (“UCTA”).
Exclusions/limitations commonly found in standard term business-to-business contracts include terms which exclude liability for any “indirect or consequential loss” and/or which limit liability to the contract price.
In the recent case of Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd  EWHC B7 (TCC), the High Court found that such terms failed the reasonableness test under UCTA.
International Decorative Surfaces (“IDS”) supplied laminate sheets to Hillmead Joinery (Swindon) Ltd (“Hillmead”). Hillmead purchased the laminate sheets in order to manufacture bonded panels for an end customer. Hillmead’s ultimate customer had complained to Hillmead that the laminate finish on the sheets was inconsistent and Hillmead therefore claimed against IDS that the laminate sheets were defective. Hillmead claimed significant sums by way of damages, primarily for the loss of its business and anticipated business with its ultimate customer over a period of six years. The claim for loss of business very significantly exceeded the value of the invoices.
In defence of this claim, IDS sought to rely on a number of its standard terms in order to exclude or limit its liability. Amongst those were terms which stated that:
- IDS would not be liable for any loss of profit, loss of business, loss of goodwill, loss of savings, increased costs, claims by third parties, punitive damages, indirect loss or consequential loss suffered by the customer as a result of any breach; and
- IDS’s liability to the customer in any claim arising out of the contract or the goods supplied could not exceed the invoice price of the good concerned.
- Hillmead argued that these terms were unreasonable under UCTA.
- The court weighed up the following guidelines set out in UCTA for determining reasonableness:
- The relative strengths of the bargaining positions of the parties;
- Whether any inducement was given to the customer to agree the term, or whether the customer had an opportunity of entering into a similar contract with other parties without having to accept a similar term;
- Whether the customer knew or ought reasonably to have known of the existence of the term;
- If a term excludes or restricts liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; and
- Whether the goods were manufactured, processed or adapted to the special order of the customer.
The Judge found that IDS was in a significantly stronger bargaining position than Hillmead. Further, there was no inducement for Hillmead to agree IDS’s standard terms and conditions. There was no evidence that the sheets had been manufactured to any special order.
On the question of whether the term limiting liability to the invoice value was reasonable, it was a crucial factor for the Judge that IDS was aware, at the time the contract was made, that Hillmead was intending to incur the expense of having the goods incorporated into finished products for onward sale. Accordingly, IDS was aware that any direct loss to be caused to Hillmead if the sheets were defective would be greater than the costs of replacing the goods/the invoice price. Taken together with his finding that IDS was in a significantly stronger bargaining position than Hillmead, this led the Judge to conclude that this term was unreasonable.
As regards the attempt to exclude all liability for consequential loss, this was also found to be unreasonable, based on many of the same factors on which the Judge relied in relation to the term limiting liability to the invoice value. The Judge took the view that if the less severe term of limiting liability to the invoice value was unreasonable then the more severe term of excluding all liability of any kind for consequential loss must also be unreasonable.
Whilst each case turns on its own facts, this case highlights the danger of attempting to impose exclusions which deny the buyer any remedy in certain circumstances. Suppliers should be aware that the Court is more likely to uphold the reasonableness of a clause which accepts some level of liability, whether direct or indirect, up to a reasonable cap. The invoice price may be considered a reasonable cap in some circumstances, but in many circumstances it will be insufficient.
On 8 July 2015, the National Living Wage (“NLW”) was introduced by George Osborne in the first Conservative Budget of this parliament. The NLW, due to come into force in April 2016, will act as a ‘top up’ wage for those aged 25 and over. It has been introduced by the government with the intention of providing a higher wage for ‘more experienced workers’ and raising the UK standards of pay to the levels set by other advanced economies. The ‘top up’ will result in an increase of the total NLW to £7.20. This is set to increase to approximately £9 an hour by 2020 and according to the Office of Budget Responsibility (“OBR”) is likely to result in a pay rise for millions of people. However the OBR also warns that the introduction of the NLW may cost up to 60,000 jobs.
George Osborne has said that businesses will receive help in adjusting to these changes in the form of cuts to corporation tax. Corporation tax will be reduced by 20% to 18% in order to offset what is predicted to be a 1% impact on corporate profits. Small firms will receive extra help by virtue of an increase in the new Employment Allowance by 50%. As of April 2014, the Employment Allowance means that employers can reduce the amount of their National Insurance Contributions by up to £2,000.
The NLW will form part of the remit of the independent Low Pay Commission (“LPC”) which currently reviews and makes recommendations for the National Minimum Wage (“NMW”). In their annual remit for the LPC, the government has requested recommendations on both the NMW and the NLW in the interests of providing businesses with more certainty.
Following the announcement of the NLW, on 1 September 2015, the Department for Business, Innovation and Skills announced its plan to introduce tougher measures, such as higher fines and potential director disqualifications to ensure compliance with both the NMW and NLW. The proposed date for the introduction of these measures has not yet been set.
The government is hopeful that the introduction of the NLW will benefit the business sector and boost the economy as a whole. However, there are obvious concerns for employers, and there are likely to be knock-on effects for employee relations. For instance, if the lower-paid end of a workforce, who are currently paid NMW, receive significant pay rises as a result of the introduction of the NLW (and subsequent increases), employees a little higher up the pay-scale are likely to feel hard done by if they are not also given an increase, even if they are not directly affected by the NLW, giving rise to potential employee relations issues and increased costs.
The High Court’s recent decision in Lachaux v Independent Print Ltd (and Ors) on the construction of the “serious harm” requirement in section 1(1) of the Defamation Act 2013 (“DA 2013”) provides welcome clarification on the new thresholds introduced by DA 2013 for defamation claims.
In Lachaux, the court had to decide, as a preliminary issue, whether certain articles published in the defendant’s newspapers had caused, or were likely to cause, serious harm to the applicant’s reputation within the meaning of section 1(1) of the DA 2013. The newspaper articles contained allegations made by the applicant’s ex wife about the applicant, which included claims of domestic abuse and kidnapping.
Section 1(1) of DA 2013 provides that a statement is not defamatory unless its publication has caused, or is likely to cause, “serious harm” to a claimant’s reputation. Since DA 2013 came into force, there has been some uncertainty as to the construction of “serious harm”.
The key issue for the court to decide was whether section 1(1) required:
- that the relevant statement had a tendency to, or was inherently likely to, cause serious harm to the applicant’s reputation; or, alternatively
- whether, on the balance of probabilities, the relevant statement had, in fact, caused, or was likely to cause, serious harm to the applicant’s reputation.
The court construed section 1(1) in accordance with the latter, more narrow interpretation of that provision. It said that the intention of the legislature when enacting DA 2013 was to go beyond showing a “tendency” to reputational harm. Following DA 2013, claimants should have to prove as a fact, on the balance of probabilities, that serious reputational harm has been caused by, or is likely to result in the future from, the relevant publication. Furthermore, the court was entitled to have regard to all the relevant circumstances, including evidence of what actually happened after publication. Importantly, the court stated that the question of whether a statement caused serious harm is to be judged on the date on which the issue falls to be determined. This should provide applicants with an extended time during which to gather evidence demonstrating that serious harm has, or is likely to, occur.
It appears that, as a result of Lachaux, in order for a statement to be actionable, there is now a requirement to show proof that it caused actual or likely serious harm to the applicant’s reputation. It has been argued that this requirement may have the effect of making it especially difficult for applicants to successfully establish a claim in defamation, due to the obvious difficulties of providing evidence of serious harm in certain instances. However, it is important to note that the court did indicate that serious harm could be evidenced by inference, which inference should be judged on the basis of the gravity of the imputation, together with the extent and nature of the publication’s audience. In instances involving statements published by an entity with a large readership, a court is more likely to draw an inference of serious harm.
In Lachaux, the court found that the articles complained of had caused serious harm to the claimant’s reputation, which harm could be inferred based on: (i) the seriousness of the allegations complained of; (ii) the reputable nature of the newspapers; and (iii) the inherent likelihood that the publications had been read by a substantial number of people who knew, or knew of, the claimant (considering the length of time he had been in the UAE, together with the large number of professional and personal contacts that he had in the UK). These are useful examples of the types of factors that a court may take into account when deciding whether serious harm may be inferred in a particular case.
Accordingly, while the court’s interpretation of section 1(1) seems to support the legislature’s intention of minimising the risk of trivial defamation claims being brought before the courts, it should not create an impossibly high hurdle for claimants to surmount, particularly given the fact that serious harm may, in certain instances, be established by inference.
The main provisions of the Consumer Rights Act 2015 (“CRA”) came into force on 1 October 2015. The CRA consolidates and clarifies existing consumer rights legislation into one comprehensive source and makes certain changes that affect all businesses selling to consumers. The key aspects are:
Sale of goods
- Rules relating to satisfactory quality, description, fitness for purpose and sale by sample under the Sale of Goods Act 1979 will continue to apply. In addition, the goods must now match a model seen or examined by the consumer.
- Contracts under which goods which are to be manufactured or produced and then supplied to the consumer will be treated as sales contracts and the goods will be treated as goods and not the end product of services.
- Where goods are both supplied and installed by a trader, the goods will not conform to the contract if not installed correctly.
- Pre-contract information required under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (for example, the identity of the trader) will be treated as included as a term of the contract.
- A new system of remedies has been introduced. Consumers will now have a 30 day “short-term right to reject” goods that do not conform to the contract. After expiry of this period, the consumer will have the right to repair or replacement. The trader will only have one opportunity to repair or replace the goods before the consumer has the right to a price reduction or a final right to reject.
- The CRA recognises digital content as a new category of product. It clarifies the position in relation to digital content not provided on tangible media (for example, where digital content is downloaded) by giving consumers of digital content the same rights as if they were buying goods, regardless of the way the digital content is supplied.
- Where digital content is provided on tangible media (for example, on a disk), and the digital content does not conform to the contract to provide that content, then the goods themselves (i.e. the disks) will not be in conformity with the contract. The significance of this is that the remedies available for goods (rather than digital content) will apply (including the two express rights to reject as set out above).
- There are no rights to reject digital content and no corresponding obligations on the consumer to return or delete that content. A right to a full refund is only available where the trader has no right to supply the digital content. In respect of other breaches, the consumer has the right to repair or replacement. In contrast to the remedies for goods, the trader has more than one opportunity to repair or replace the content. The consumer also has a right to a price reduction (potentially as much as a full refund) where repair or replacement is impossible or not carried out within a reasonable time and without significant inconvenience to the consumer.
- Where digital content supplied causes damage to a device or to other digital content, the trader must either repair the damage or financially compensate the consumer for the damage if the consumer can demonstrate that the damage was caused by the trader’s failure to exercise reasonable care and skill.
Supply of services
Any information provided to the consumer about the trader or service, by or on behalf of the trader, will now be treated as a term of the contract if taken into account by the consumer. This recognises that consumers may be disadvantaged where they rely on a trader’s statement and the trader later does not comply with it. Thus, businesses selling to consumers should review their marketing materials and make their consumer-facing staff aware of the changes and new risks involved in making voluntary statements to consumers which are later not complied with.
Unfair contract terms
The requirement of reasonableness under the Unfair Contract Terms Act 1977 is replaced with a fairness test. A term is not binding on a consumer if, contrary to the requirement of good faith, it causes significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. There are two exclusions from the assessment of fairness: the main subject matter of the contract and the price payable under the contract, provided that these terms are prominent and transparent.
It is important for businesses selling to consumers to understand the changes brought about by the CRA and adapt their practices accordingly. Most importantly, existing terms and conditions and marketing materials should be reviewed and staff trained to avoid potential future compensation claims.
Benefits of the Community trade mark (“CTM”) system
Since 1996, the CTM registration system has been widely used by businesses all around the world as a way of obtaining protection for their brands in the EU, and for good reason. For those that have or plan to have a presence in some or all of the Member States, the system offers excellent value for money. For the price of two or three national registrations, a brand owner can, via the CTM system, obtain protection in all the Member States of the EU (currently twenty-eight).
The CTM systems has attracted even those businesses that have a presence in only one Member State (with no immediate plans for expansion), the system has still been an attractive one. For a relatively small price, a CTM acts almost as a form of insurance against a conflict in the future (with a later user of a confusingly similar brand) should the business ever decide to extend its trade into neighbouring European territories.
The ‘use it or lose it’ rule
At least, that has been the case until now. As with most trade mark systems around the world, the CTM system enforces a ‘use it or lose it’ rule. This means that a CTM can become vulnerable to cancellation if it is not used within five years of registration. As a unitary right for a single European market, it has always been considered (although hotly debated) that use of a CTM in a single Member State equals use in the ‘Community’ (i.e. the EU), shielding it from any attack or allegation that it should be cancelled on the grounds of non-use.
Not anymore. The UK Intellectual Property Enterprise Court (IPEC) recently held in The Sofa Workshop Ltd v Sofaworks Ltd  EWHC 1773 (IPEC) that Sofa Workshop’s CTMs for the “Sofa Workshop” trade marks should be revoked in their entirety despite evidence that the marks had been used on an extensive scale in the UK over a number of years. The Court was firmly of the view that use of a CTM in just one Member State (irrespective of the size of that Member State) is not enough to maintain a CTM.
The IPEC deals with intellectual property issues and forms part of the Chancery Division of the High Court in the UK. It’s far from clear whether or not the Court of Appeal or the Court of Justice of the European Union (CJEU) would share the same view as the IPEC in its decision in the Sofa Workshop’s case, but it’s unlikely that we will find out very soon. This is because the challenge against The Sofa Workshop’s CTMs was filed in response to an action for trade mark infringement and passing off brought by The Sofa Workshop against Sofaworks. Although The Sofa Workshop failed in its trade mark infringement claim, it succeeded in the passing off claim, and therefore emerged as the “winner” in the case, despite losing its CTMs.
Time for a review
As a result of the IPEC’s decision in The Sofa Workshop case, and unless and until a higher court comes to a different decision, businesses should think carefully before embarking upon trade mark litigation in the UK based on CTMs that are over five years old. Unless the trade mark in question is used in at least one other territory (as well as in the UK), steps should be taken either to acquire a national UK trade mark registration to supplement the CTM, or to convert the CTM into a UK trade mark registration (but this would involve giving up the CTM at a time when we may not have heard the last word on the matter) before any litigation is commenced. Ideally, all businesses (whether or not any imminent enforcement action is required) should review their trade mark portfolio to check for any vulnerability.
For new applicants, it will be important to decide at the outset whether to file a CTM or a national trade mark application, or indeed both, depending on their plans for use of the trade mark beyond the first five years.
There is an infinite number of legal matters on which filmmakers seek advice. Nevertheless, certain questions frequently arise: is permission required to use material from a book? Does a contract have to be in writing? May classical music be used in the background of a scene? Does an interviewee need to sign a release? How do I protect my share of net profits if the film is successful? Marriott Harrison’s Head of Media, Tony Morris, has written the Filmmaker’s Legal Guide which addresses the practical legal needs of those producing, financing and exploiting all manner of audio-visual productions – features, documentaries, shorts, television programmes and other audio-visual content.
The book’s pitch is not to lawyers and the Guide is not intended to be a legal text book. The key issues that require consideration in the context of contractual or other legal imperatives are analysed and explained in a manner that concentrates on the practical needs of filmmakers. The text makes extensive uses of examples that are both instructive and, frequently, a reminder of how to avoid problems.
Divided into five parts, the Guide addresses in turn: content, rights, a general introduction to contracts, cast and crew agreements and, finally, production contracts. In turn, each part comprises a number of sections that cover a wide range of subjects including copyright, protecting ideas, moral rights and performers’ consent, clearing third party rights, fair use, moral rights, defamation, music, titles, documentaries, interviews and trade marks. The contract section includes useful tips on how to create a binding agreement – or indeed, to avoid being bound in negotiations. The structure of different contracts in film/audio-visual production is analysed. The Appendices include eight sample contracts.
Although written from the standpoint of an English lawyer applying English law principles, much of the practice described is of more general application. Intellectual Property Law has been largely harmonised throughout the EU; nevertheless, there are some differences of application – one example being that of moral rights. In relation to certain subject matter, the US First Amendment may enable a documentary maker to use a broader palate from which to analyse and comment than the equivalent English law. There are references to these similarities and differences in the text.
While addressing the practical needs of the filmmaker, the Guide is not intended to be a substitute for tailored advice on the specifics and intricacies of individual projects. Filmmakers are recommended to take informed advice at a level that will equip them to deal effectively with the legal requirements of any particular project in which they are involved – and in some cases that may involve lawyers practising in more than one jurisdiction.
The Filmmakers’ Legal Guide will be published in October 2015 as an e-book by Brown Dog Books and The Self-Publishing Partnership. More information may be obtained from firstname.lastname@example.org.