Are you ready to be bound?
The recent case of Newbury v Sun Microsystems  EWHC 2180 highlights the importance of including the words ‘subject to contract’ if you do not intend proposed terms of a contract to become binding.
Against the background of negotiations to settle a dispute, on 03 June 2013, Sun Microsystems’ solicitors wrote the following to Newbury’s solicitors:
“Our client is willing to settle the entire proceedings by paying the Claimant [Newbury] within 14 days of accepting this offer, the sum of £601,464.98 . . . such settlement to be recorded in a suitably worded agreement. This offer is open for acceptance until 5pm this evening . . .”
The same day, Newbury’s solicitors wrote a letter of acceptance:
“We thank you for your letter dated 03 June 2013. We are instructed that the Claimant [Newbury] accepts the terms of your client’s offer . . .We will forward a draft agreement for your approval on Tuesday 04 June.”
A dispute arose about the form and substance of ‘such settlement to be recorded in a suitably worded agreement’. In particular, Sun Microsystems wanted the ‘suitably worded agreement’ to both modify and supplement the terms set out in their 03 June 2013 letter.
Newbury’s solicitors refused to agree to those modified and supplemental terms, and contended that the correspondence between the parties had given rise to a binding contract.
The court agreed with Newbury and noted the following:
- The language used in Sun Microsystems’ letter of 03 June constituted an offer of settlement, and set out the terms of that offer.
- The terms contained in that letter clearly indicated that it was intended to be capable of acceptance, and it was so accepted.
- “Such settlement to be recorded in a suitably worded agreement” was a reference to the terms set out in Sun Microsystems’ letter of 03 June 2013.
- The words ‘subject to contract’ would have indicated that the terms were not intended to be binding until a formal contract was agreed.
Pitfalls to avoid
- Be wary of negotiating contract terms without informed legal oversight.
- Whilst a failure to append the words ‘subject to contract’ to contractual negotiations will not automatically mean an offer capable of acceptance has been made, if ‘subject to contract’ is appended to such negotiations, it will clearly indicate that the terms being discussed are not yet binding or agreed until the fulfilment of a further condition such as the execution of a formal contract.
It’s good to have faith
The recent case of Yam Seng PTE Ltd (“Yam Seng”) v International Trade Corporation Ltd (“ITC”)  EWHC 111 (QB) provides a little hope for those seeking to rely on an implied duty to act in good faith in a commercial contract.
It is generally accepted that English courts will uphold an express term of a contract which requires the parties to act in good faith towards one another. However, under English law there is no general duty to perform contracts in good faith where such a duty is not written down in the contract.
The Yam Seng case concerned a distribution agreement for fragrances and toiletries bearing the brand name “Manchester United”. ITC granted Yam Seng the exclusive right to distribute the products in Hong Kong, Macau and parts of mainland China. Yam Seng and ITC were two companies each being controlled by one main individual.
The relationship between these individuals broke down and Yam Seng terminated the distribution agreement claiming a number of repudiatory breaches of the agreement on the part of ITC. In particular, Yam Seng claimed that ITC had an implied duty to act in good faith and to not knowingly provide false information to Yam Seng.
The Court agreed that ITC had committed more than one repudiatory breach of the agreement and that ITC had a duty to act in good faith, which it had not. The Court also acknowledged that there was not a general legal principle under English law where contracting parties are under a duty to act in good faith. However, the Court did highlight certain circumstances where such an obligation may be applied based on the facts of the case.
The Court considered the type of contract or relationship where a duty to act in good faith may be implied by law. For instance, where a contract is a long-term contract or where the parties to the contract have made a significant commitment in respect of that contract and there is a expectation the parties will co-operate and share information between one another (a “relational contract”). Typically, such relational contracts may be joint venture agreements, franchise agreements or long-term distributorship agreements.
The Court held that Yam Seng had incurred significant expense in this case and, to its detriment, had heavily relied on the false information it had been given by ITC. The Court took an objective view in determining that, based on Yam Seng and ITC’s intentions and the context in which the contract was formed, good faith was found to be an implied term in the contract.
This case shows that the courts may be willing to imply a duty to act in good faith into a contract depending on the facts on a case by case basis and that the contracting parties should, before entering into a contract, consider whether the duty to act in good faith could be implied. In principle, contracting parties always have the right to expressly exclude the obligation to act in good faith – but then such a stance may raise other obvious questions.
Is your business ready for the B2C VAT changes?
In a little over 13 months, businesses that sell e-services (telecoms, broadcasting and “electronically supplied services”) to non-business consumers within the European Union (B2C) will experience a dramatic change in VAT.
On 1 January 2015, legislation comes into force which will change (i) the place of supply and (ii) the country of taxation of e-services, from the country in which the supplier is established to the country in which the consumer is resident.
As many e-service businesses are based in EU Member States that have favourable VAT rates, (standard VAT rates vary from 15 per cent. in Luxembourg to 27 per cent. in Hungary), the legislation is likely to mean either a sharp increase in the prices charged to consumers or a cut in suppliers’ profit margins.
What services will be affected?
HMRC has provided the following, non-exhaustive guidance that the following services will be effected:
- telecommunications including: fixed and mobile telephone services; videophone services; paging services; facsimile, telegraph and telex services; access to the internet and worldwide web.
- broadcasting services including: radio and television programmes and live broadcasts over the internet.
- e-services including: video on demand, downloaded applications (or “apps”), music downloads, gaming, e-books, anti-virus software and online auctions.
What are the changes?
There are two key changes:
- The VAT place of supply rules will change. An e-service business will now account for VAT in the place where its services are consumed.
- The introduction of the VAT Mini One Stop Shop (“MOSS”). MOSS will be an online service allowing businesses to account for all VAT in the EU through a single registration with HMRC. The total tax payment will be paid over to HMRC who will distribute it to the other EU tax authorities as appropriate. Businesses will be able to register for MOSS from October 2014.
How will this affect your business?
The proposed changes will have an effect on e-service businesses beyond VAT. Additional effects that will need to be carefully considered include:
– will this need to be re-assessed on a State by State basis?
– how will your business ascertain the location of its customers to establish the appropriate VAT?
– what data protection laws will need to be complied with in order to attain and store this customer information?
What should you do?
To be ready for the changes you should:
- assess which of your services will be caught by the new rules and make sure the relevant departments are aware of the new legislation;
- update your software and accounting systems to be able to identify the location of the customer;
- understand the rates of VAT in every EU Member State, and confirm the rates applicable to your services;
- assess and manage your pricing and billing procedure; and
- be ready to register for MOSS by October 2014.
Sleeping Partners and National Insurance Contributions (NICs)
On 4 April 2013, HMRC announced an adjustment in its view of the status of sleeping partners and inactive limited partners regarding National Insurance Contributions (“NICs”).
Historically, sleeping and inactive limited partners who took no active part in the running of the business, and simply acted as investors who sought to make a return on their investments, were not liable for Class 2 and Class 4 NICs as their income was treated as unearned income. HMRC now considers both sleeping partners and inactive limited partners to be liable (and to have been liable in the past) for:
- Class 2 NICs as ‘gainfully employed’ self-employed earners; and
- Class 4 NICs in respect of their taxable profits.
From 6 April 2013 sleeping and inactive limited partners will be liable to pay (where applicable) both Class 2 and Class 4 NICs. It is now therefore necessary for all sleeping and inactive limited partners to check their NIC status and confirm whether they have already been paying Class 2 and/or Class 4 NICs. Those who have not been paying Class 2 NICs as a result of being self employed are required to inform HMRC of their employment status using Form SA401 and to arrange for payment of Class 2 NICs.
Sleeping and inactive limited partners who find that they have already been paying Class 2 and Class 4 NICs will not be entitled to a refund from HMRC. This is due to HMRC applying the adjusted view retrospectively and considering those past payments legally due and paid.
This may seem somewhat unfair when contrasted with the fact that those partners who have not been paying Class 2 or Class 4 NICs in past years will not be required to account for those ‘missed’ payments. However, should these particular partners wish to qualify for, or improve their entitlement to, contributory benefits such as the basic state pension, then they may volunteer to pay such past payments if they so wish. Because the announcement was made very late in the 2012–13 tax year and Class 4 NICs are assessed annually HMRC has said that those partners liable for Class 4 NICs are liable only for the 2013–14 tax year.
Sleeping and inactive limited partners may qualify for one of the exceptions to paying Class 2 NICs. This will depend on personal circumstances and partners should check with HMRC to see whether they will qualify for an exception. This can be done at the same time as registering or checking their NICs history.
This announcement took many by surprise and it remains unclear why HMRC chose to clarify this particular point when they did. In particular the odd timing of the announcement at the very end of the tax year suggests this may not have been a long considered shift in stance.
The recommendation, therefore, is for practitioners to review the NIC positions of all sleeping or inactive limited partners for whom they act and proceed to register their self-employed status with HMRC and/or consider any necessary claims for exemption or deferment.