Single typo costs Companies House £8m

Companies House liable for mistakenly saying Company had been wound up

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Background

Companies House has been held responsible for the financial collapse of Taylor & Sons Ltd, of Cardiff, a 124 year old engineering company. On 20 February 2009, Companies House mistakenly recorded on the register that a winding up order had been made against it. But there was a typo; it was an entirely unconnected company with a very similar name, “Taylor & Son Ltd” that had been wound up. After 3 days the error had been corrected. By then it was too late.

Companies House had sold the records to credit reference agencies. Customers and suppliers wouldn’t trade with the blameless and solvent Taylor & Sons Ltd; they lost business, income and credit. Within two months the business, which employed 250 people collapsed and it was forced in to Administration.

 

Negligent Misstatement

 The Co-Owner and managing director of Taylor & Sons Ltd, Philip Sebrey took proceedings against Companies House, an executive agency of the Department of Business, Innovation and Skills. His claim was based on the law of negligence, which has been developing continuously since the leading 1963 Case of Hedley Byrne v Heller[i], extending the law of negligence. Where a careless statement is made which causes economic loss, the victim can claim damages. That now includes cases involving the careless exercise of statutory powers.

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Decision

After a 4 year battle, the claim for compensation succeeded. Sebry v Companies House [2015] EWHC 115[ii]. Although damages have not yet been decided, the claim is for approximately £8m.

The Judge, Mr Justice Edis said that the long standing 3 stage test in Caparo[iii] applied:

  • Forseeability: this was “obvious”
  • Proximity: the duty was owed to one individual company whose identity was readily discoverable. To say that it was also owed to every other company on the Register is only to say for example that a hospital owes a duty to each patient which it treats, and may come to owe duties to many thousands of people in the course of a year. Whilst true, this is not a reason for denying that the hospital ever owes any duty. Very large organisations such as hospitals who impact on the wellbeing of a very large number of people owe a very large number of duties to a very large number of people. The class is limited and its members ascertainable at the stage when treatment is given
  •  Whether it is fair, just and reasonable to impose a duty: The Judge could find no proper ground on which to conclude that it would not be fair, just and reasonable to impose a duty to avoid foreseeable harm to a sufficiently proximate victim.

Conclusion

“…..the Registrar owes a duty of care when entering a winding up order on the Register to take reasonable care to ensure that the Order is not registered against the wrong company. That duty is owed to any Company which is not in liquidation but which is wrongly recorded on the Register as having been wound up by order of the court. The duty extends to taking reasonable care to enter the Order on the record of the Company named in the Order, and not any other company. It does not extend to checking information supplied by third parties. It extends only to entering that information accurately on the Register….”

Ultimately, Edis J could see no legal principle or policy excusing Companies House for its negligence. Where there is a legal wrong, there ought to be a remedy. If Companies House had escaped liability, Mr Sebrey would have had no redress. The previous understanding of the law has been applied, and moderately extended under the doctrine of “incrementalism”.

For liability to be established, a claimant has to prove that it suffered losses directly as a result of reliance on a negligent misstatement. An executive agency carrying out a statutory function was not immune. However, the liability in these particular circumstances did not extend to other, less proximate or easily identifiable parties, including lenders and employees.

 

[i] [1963] 2AC 465

[ii] http://www.bailii.org/ew/cases/EWHC/QB/2015/115.html

[iii] Caparo Industries v Dickman [1990] 2 AC 605

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New Professional Negligence Pilot: Adjudication

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Scheme launched 1 February 2015

Adjudication is a form of ADR (Alternative Dispute Resolution). A new voluntary scheme is being piloted aimed at professional negligence claims of less than £100,000 (excluding costs). This is of particular interest in solicitors’ negligence claims.

The objective is to see if claims can be resolved without the issue of Civil Court proceedings. There would be a substantial likely saving in terms of costs to all parties, time, and court resources. This is particularly apt in view of the forthcoming hike in Civil Court Issue fees.

The Adjudication process is aimed at any professional negligence claim, whether wholly or in part.

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Key advantages of Adjudication

  1. It is possible to obtain a reasoned judgment enforceable in Court for much lower cost than using Court proceedings.
  2. The scheme can work with the pre action protocol claim and response letters as submissions from the parties.
  3. The PNBA  (Professional Negligence Bar Association) have appointed a panel of 5 adjudicators for the pilot, all with many years of experience in this type of claim on standard terms of business and cost.
  4. The scheme itself is designed as a precedent which can be adapted by agreement for individual cases – adaptations agreed will be useful in assessing the feedback.
  5. Interlocutory points/preliminary issues could be adjudicated if a barrier to other forms of ADR like mediation and/or as a cheaper and quicker alternative to Court hearings.
  6. The meeting and process could be agreed as similar to mediations at similar cost.

The adjudication pilot is appropriate where the claimant seeks damages or compensation in a professional negligence claim with a financial value. The scheme and terms of business can be used or adapted for any case even if the parties do not wish to provide feedback or take part in the pilot. The pilot scheme details are being circulated to PNLA (Professional Negligence Lawyers Association), ABI (Association of British Insurers) and PNBA members.

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The introduction from Mr Justice Ramsey as approved by the Ministry of Justice provides the background. The Judge is looking for 3 pilot cases with feedback by June:

‘I am pleased to say that the Ministry of Justice have agreed to be involved in these discussions and to consider whether, as a result further steps might be taken to include adjudication of professional negligence claims as part of civil procedure or take other steps to introduce ways to minimise the costs and costs exposure of those who wish to bring professional negligence claims.’

Feedback is being administered on a neutral basis by Masood Ahmed of Leicester University in consultation with the Ministry of Justice

http://www2.le.ac.uk/departments/law/people/masood-ahmed

Limits to Adjudication

Adjudication is one of the many forms of alternative dispute resolution, such as mediation, arbitration, conciliation, negotiation, mini trial, expert determination etc.

Adjudication could have an important role to play.  It is derived from the statutory provisions which apply to construction contracts.  Adjudication allows a person with specialist knowledge in a particular field to provide a temporarily binding decision on the merits of a dispute within a short time and at minimum expense.

Experience has shown that, whilst parties can then seek to have a final determination of the dispute in the Courts, they often do not do so.  In the vast majority of  cases they accept the adjudication or use it as a means of settling the dispute.

In his introduction to the pilot scheme (which is also monitored by the Ministry of Justice) Mr Justice Ramsay explains that some practitioners consider that adjudication is particularly appropriate in resolving disputes in professional negligence cases where, without some independent decision on the merits, the parties may not be able to resolve their dispute.  The fact that the decision is temporarily binding means that the parties are not finally bound by the decision, but clearly a decision by a specialist adjudicator has to be given great importance in deciding whether to seek a finally binding decision in litigation through the Civil Courts.

The aim of the pilot scheme is that it shall run until 3 cases have been adjudicated, and the relevant feedback has been analysed.  The Ministry of Justice is to be involved in the subsequent review and to consider whether, as a result further steps might be taken to include adjudication of professional negligence claims as part of civil procedure accross the board, or to consider other ways to minimise the costs and costs exposure of potential claimants in professional negligence disputes.

If the scheme proves to be popular, and as a potential route to reduce costs and delay, other claimants and parties are likely to be interested in participating in adjudication of professional negligence claims, outside of the pilot scheme.

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Personal Pensions safer from creditors

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On 17 December 2014 Mr Robert Englehart QC sitting as Deputy Judge of the High Court delivered judgment in Horton v Henry[i]. He decided that uncrystallised pensions benefits can be protected from creditors. The judge declined to follow the previous decision, of Raithatha v Williamson[ii]. Instead he held that a trustee in bankruptcy could not gain access to pensions benefits that were not already in payment.

BACKGROUND

In Horton v Henry, Mr Henry’s trustee in bankruptcy was applying for an income payments order (“IPO”) against Mr Henry’s pensions policies that had not yet vested. The bankrupt had refused to crystallise them. The trustee was seeking an order requiring Mr Henry to draw down his:

  • 25% lump sum from his self-invested personal pension (“SIPP”);
  • 36 monthly payments in flexible drawdown
  • the annuity value of his personal pensions.
  • the trustee also sought the right to vary the IPO in future, after the new pensions access provisions apply.

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DECISION

The Judge declined to make an Income Payments Order over an uncrystallised pension compelling a bankrupt of pensionable age to draw down his pension. He considered that, contrary to the reasoning in Raithatha, there was no power vested in the court pursuant to section 310 of the Insolvency Act 1986 to make an income payments order in respect of an uncrystallised pension not yet in payment. The Judge said:

‘…I have most anxiously considered the decision in Raithatha but I have, albeit with considerable reluctance, come to a different conclusion. Mr Henry is not entitled to payment under his pensions “merely by asking for payment”. There is a considerable variety of options open to him. It would only be after he had made elections that any payment would be due to him. Only then would he become entitled to any payment. I do not consider that there is any power in the court under s310 or in the trustee to require Mr Henry to elect in any particular way…’

Raithatha v Wiliamson had decided that an order could be made. That case was subject to criticism, but was not appealed because the case settled.

The Judge explained:

‘…I regret having had to reach a different conclusion from that reached in Raithatha. But it is to be hoped that the Court of Appeal will soon have the opportunity of considering which of these two first instance decisions is correct….’

It is understood that permission to appeal has been granted, and the Court of Appeal is likely to hear the appeal in the Spring 2015, which will provide an opportunity to resolve which of the conflicting approaches is correct.

IMPLICATIONS

  • Pending clarification from the Court of Appeal, a trustee in bankruptcy can’t compel a bankrupt to draw down a pension not in payment.
  • However, if a bankrupt’s pension is in payment, a trustee in bankruptcy is still entitled to seek an IPO where appropriate.

[i] [2014] EWHC 4209 (Ch); [2014] WLR (D) 551;

http://www.taxbar.com/Henry_v_Horton.pdf.pdf

[ii] [2012] 1 WLR 3559

 

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Supreme Court gives M&S permission to appeal

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Break clause lease dispute: wider implications

In a long running saga, the Supreme Court has recently given Marks and Spencer permission to appeal a decision of the Court of Appeal[i]. The dispute relates to a lease between the parties which was terminated early under a break provision. There were earlier conflicting decisions of the High Court and the Court of Appeal as to whether M&S were entitled to a refund from their Landlord. The case is likely to have wider importance in view of differing legal interpretations on the importance of “necessity” in relation to terms that should be implied into a contract.

This extends beyond Landlord and Tenant law, and may touch any commercial or other contract. The Supreme Court (formerly the House of Lords) deals only with cases which:

“raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time, bearing in mind that the matter will already have been the subject of judicial decision and may have already been reviewed on appeal”

 Background

In May 2014 the Court of Appeal held that M&S had no express right to a refund on the exercise of the break clause: any intention should have been set out in express terms if there was to be a refund. No such right could be implied into the contract without express provisions. M&S lost out on their claim for a refund of rent, insurance and car parking charges for the period after the break date. Before M&S could activate the break clause, they were obliged to pay the full quarter’s rent in advance.

The High Court had previously decided that because the break conditions required payment of a penalty by M&S, the parties could not have intended that the Landlord would be entitled to retain the excess rent in addition. Accordingly, the High Court found that there should be an implied term that the excess rent was in fact repayable. This was rejected by the Court of Appeal.

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Issue

The Court of Appeal followed the previous leading case, Attorney General of Belize v. Belize Telecom [2009] UKPC 10. The Privy Council found the test to decide whether a term should be implied as a fact (as opposed to law) into a contract was broadly:

 “Is that what the instrument, read as a whole against the relevant background, reasonably be understood to mean?”

So, in order to be implied, a term must be necessary to achieve the express intention of the parties in the context of the admissible background. The importance of the decision in early 2009 is clear from the fact that it was cited in eight other cases that year.

Next step

The Supreme Court is likely to be considering the extent of inconsistency as to interpretation of the word “necessary” across the board, and the meaning of the word itself in the context of the case. That the Supreme Court has granted permission to appeal suggests that it may be reviewing break conditions in particular, or undertaking a wider analysis of how terms are implied into leases and commercial contracts more generally in order to achieve a just outcome.

No date has yet been fixed for the appeal before the Supreme Court.

Implications

Although the decision will be awaited with interest, this is a timely reminder that, so as to avoid uncertainty and ambiguity, parties should

  • expressly set out their commercial intentions in the written contract
  • consider the likely outcome of events that are described in the contract or are otherwise predictable, and whether these are sufficiently provided for in the contract
  • obviously, leaving matters to chance and calling on the Court to intervene and imply terms much later leads to uncertainty and avoidable expense.

[i] Citation:

Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2014] EWCA Civ 603
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A Lawyer’s Christmas Carol?

On the twelfth day of Christmas, my true love sent to me:
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  • Twelve drummers drumming:  but I turned them away at the door – hasn’t she heard of offences under s4 Noise Act 1996 after a warning from the local authority?

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  • Eleven pipers piping: didn’t she learn anything from the 12 drummers incident? The bagpipers soon made themselves scarce when I cited the Big Book of British Laws to the effect that it is still legal to shoot Scotsmen with a bow and arrow in York (except on Sundays).
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  • Ten lords a-leaping: possibly in anger as a result of the House of Lords having been replaced by the Supreme Court as the ultimate appellate court of the UK but more likely they are trying to avoid their expenses being investigated and I am not risking guilt by association.
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  • Nine ladies dancing: no thanks – it sounds suspiciously like a licensable activity under section 1(1)(1)(c) Licensing Act 2003 to me.
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  • Eight maids a-milking: why on earth would she think that my house was geared up to comply with the EC 852/2004 Hygiene of Foodstuffs Production Regulations?     swans-429191_640
  • Seven swans a-swimming: did she really expect me to accept them when it was illegal for her to take the swans in the first place under the Wildlife and Countryside Act 1981?6 geese-47317_640
  • Six geese a-laying: – birds are clearly not her strong point. It is of course an offence to disturb any wild birds whilst near their nests containing eggs under s1 of the 1981 Act.gold-522369_640
  • Five gold rings: I know I’ve already been a little ungrateful but a gift of five rings is a little suspicious. One is customary. I can’t help thinking that they may belong to the Crown under the Treasure Act 1996 or, given her track record for illegality, I could be handling stolen goods under s22 Theft Act 1968.parrots-277093__180
  • Four calling birds: I hardly need mention that door to door saleswomen need a Pedlar’s Certificate under the Pedlars Act 1871.
  • Three French hens: surely she must know that I’m not a member of the Poultry Health Scheme and that my house has not been inspected by DEFRA under Directive 90/539/EEC (as amended).
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  • Two turtle doves: I really do appreciate the sentiment but, in case the billing and cooing stops, I’ll just ask her to sign this little 83 page Pre-nup under Radmacher v Granatino  (2010)

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  • And a partridge in a pear tree: See 3 and 6 above, but at least she has delivered it in time for me to enjoy a little Christmas sport, given that partridge shooting is allowed between 1 September and 1 February in every year under section 3 Game Act 1831.partridge pear tree-33089_640

However, given her propensity for breaking the law, I tend to think that the latter was by good luck rather than good management and so, as a lawyer, I will have to give some serious consideration as to where this relationship is going in the New Year.

David Grice (Lupton Fawcett Denison Till, York)

Rider: No warranty as to current law or otherwise is intended or implied, readers to rely on own searches and enquiries. Any similarity to any person living or dead is not intended and is purely coincidental. No animals were hurt in this production.

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8 Ways to avoid a Business Dispute

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Despite the best of intentions on all sides, disputes can arise when entering in to a new commercial contract or business relationship. According to Government figures, between April and June 2014 a total of 370,744 claims were issued in the Civil Courts (excluding Family Cases). This was a decrease on the previous quarter, but that saw the highest number of claims since 2009. A significant number  relate to business disputes.

From long experience, the following ground rules should help to reduce the risk of things going wrong in a business contract, or if they do, ensure you are in the best position to protect your interests:

1 Contractual Terms

These are key to many disputes, and the outcome of claims often turns on what the contract says. The terms and conditions should be read carefully. Ensure that your terms and conditions are drafted or approved by a specialist contract lawyer with experience of your sector. It is essential that these are regularly reviewed and kept up to date, and of course, that the terms represent your understanding of what has been agreed.

Be careful about negotiations and representations made during pre contractual discussions. Although many statements will be just sales talk, others might be construed as a term of the contract.

2 Entire Agreement

This should ensure that the contract between the parties is contained in a single document. The aim is to prevent extraneous documents or communications being relied on e.g. statements or representations made during pre contract discussions.

3 Exclusion clauses

Exclusion clauses may seek to exclude liability for consequential loss, or limit liability to a specified figure. Consideration should be given to whether these are enforceable:

  • do they apply to the areas of dispute most likely to arise?
  • are they as wide as might be assumed?
  • exclusions of “consequential” or “indirect” losses might not apply to claims for loss of profits or other loss amounting to reasonably foreseeable direct losses, within the reasonable contemplation of the parties when entering in to the contract

NB: Under the “contra preferentum” rule, any contractual term which is unclear is interpreted against the party that wants to rely on it.fun-and-games-until-204943-sfreeimages

4 Deadlines

Be realistic about fixing deadlines and be circumspect about specific dates if possible. If it seems as though a date under a contract might be missed, a revised timetable should be negotiated and recorded in writing, before time runs out. Any such variation of the contract terms should be signed by both sides.

5 Dispute Resolution Clauses

You can specifically set out means of settling disputes before they arise, e.g., good faith negotiations, Alternative Dispute Resolution, or mediation stand every chance of resolving a dispute, whilst preserving relations with the other side. This could be crucial where a valuable supplier or customer is involved. Serious consideration should be given as to whether Arbitration, as opposed to court proceedings should be specified. This may often be inserted, without considering the pros and cons, because Arbitration is not necessarily simpler or cheaper than the courts.

6 Internal Communications

Take care over written internal communications, including by email and on any company and employee’s devices. This applies pre contract, and after the contract has been agreed. If a dispute arises, under the Civil Procedure Pre Action Protocols and court rules, all relevant internal communications have to be disclosed (unless subject to legal advice privilege – where lawyers are already advising as to a dispute).

7 Negotiations

Clear communications with your supplier or customer is essential too. Being assertive but not confrontational and having clear lines of communication can help avoid misunderstandings in the first place that can otherwise lead to disputes. If it transpires that some contractual terms can’t be met, inform those affected as soon as possible.

 

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8 Identify Potential Issues Early

Early dialogue can often resolve problems, and prevent them turning in to a dispute. The party claiming breach of contract will have to prove that they acted reasonably to mitigate their loss. As such, the earlier a potential difficulty is addressed, the better chance of a satisfactory resolution being reached, or losses minimised.

Often a case that ends up in court is due to the potential problem not being identified early on, or not dealt with appropriately. In this way, seemingly innocuous molehills can turn in to mountains.

Whist not advocating full scale crisis management procedures for every teething problem, there should be a routine reporting system enabling potential litigious issues to be reviewed. Although businesses may be reluctant to involve solicitors at the start, in fact reporting at an early stage to in-house or external lawyers would be likely to make the communications privileged from production.
This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Directors Hoodwinked out of €100 million broke duties to their Company

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The High Court has decided that two directors tricked by fraudsters failed in their duties to exercise reasonable skill and care. They paid €100 million of Company money in to a sham investment scheme induced by fraudulent misrepresentations.

Mr Justice Peter Smith said that, like many such fraud cases superficially the document looks technical and highly detailed. On closer reading it is full of incoherent phrases and expressions and is completely meaningless.

It is impossible to overstate the level of incompetence demonstrated by [the Group Legal Counsel’s] evidence at this trial. He did no checks on the background of these people trying to sell this transaction to him…He discovered nothing about the details of the transactions…He accepted without challenge anything they said. Finally in October 2011 he signed away control of €100 million, despite being required never to agree anything like that…He took comfort from documents that were meaningless…If he were uncertain as to the law, he should have obtained advice from somebody else. That is what one would expect of a senior in-house legal counsel who might have knowledge of generalities, but would not necessarily have knowledge of specifics. It is plain that he had no idea what the investments were, but was content to accept the vague descriptions provided by the defendants and fell into the trap of believing in the secrecy of everything.

The Directors committed the Company’s funds in a “ridiculous and reckless” way. It was difficult to understand how the directors had failed to spot the scam: an extremely modest level of probing the deal would have shown that it would fall apart. Their conduct was seriously inadequate regarding the discharge of the duties that they owed to Company as officers and senior employees / directors to perform their duties with reasonable skill and care.

Although this case was decided under Maltese law, the High Court’s conclusion that two directors were in breach of duty is noteworthy. The general application of English law was made clear. Directors in this situation could face personal liability to the Company for losses caused by third party fraudsters.

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However, there was no basis for findings of breach of their fiduciary duty or contributory negligence against them in favour of the Defendant (those involved in the scam). The Judge refused to reduce the damages payable to the Company by the fraudsters. The directors were duped and incompetent; fools not knaves in failing to spot that the scheme was fraudulent and bound to fail.

Director’s Duties

The Companies Act 2006 contains a general statement of directors’ fiduciary and common law duties.

  • S 171 to act within their powers
  • S 172 to promote the success of the company
  • S 173 to exercise independent judgement
  • S 174 to exercise reasonable care, skill and diligence
  • S 175 to avoid conflict of interests
  • S 176 not to accept benefits from third parties
  • S 177 to declare an interest in a proposed transaction with the company

The codified duties apply to all directors of a Company (including shadow directors and, in certain circumstances, former directors).

Director’s Potential Liability

This case decided the liabilities between the defrauded Company and the fraudsters. The award against the fraudsters was not reduced due to negligence by the gullible directors. However, it did not decide whether, or how much the directors should reimburse the Company for its losses.  

As here, where a director has broken his duty to exercise reasonable care and skill, but not his fiduciary duties, the court will consider what might have happened had it not been for the director’s breach. The court has to decide whether the Company would have suffered the losses any way. If not, the director may have to compensate the Company for all of its losses caused by his breach of duty to exercise reasonable care and skill

As a matter of public policy, the courts accept Company directors have to make judgments and take risks. Too harsh an approach to directors’ conduct would have a “chilling” effect; it would discourage people either from becoming directors, or make them too risk averse for the good of the business.

Conclusion

Directors who are in breach of duty can ask the court for relief from sanctions on the grounds that they acted honestly, reasonably and that it is fair in all circumstances of the case to relieve him of liability. A director may also be protected from liability by the company ratifiying his conduct. Alternatively, a Directors & Officers’ Insurance Policy may cover the relevant liability. Obviously, all of these are a very poor second best to remaining vigilant and following the old maxim: if it looks too good to be true, it probably is!

Although the case is being appealed, it is a timely reminder of the risks of fraud to which Companies are exposed, the duties on Directors, the consequences of breach and the need for vigilance.

Case:

Group Seven Limited v Allied Investment Corporation Limited and others [2014] EWHC 2046 (Ch).

Link:

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1509.html

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Companies have Human Rights too!

The High Court has upheld the right of corporations to bring claims under the Human Rights Act.

 

Breyer Group Plc and others v Department of Energy and Climate Change [2014] EWHC 2257

Compensation of £140 million is claimed by the companies against the Department of Energy and Climate Change (DECC) under the review of its solar PV (photovoltaic) feed-in tariff (FITs) scheme.

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The Court of Appeal and Supreme Court had previously decided in Judicial Review proceedings that DECC’s actions were unlawful. The DECC had failed to follow the FITs statutory review procedure for changing tariffs by issuing a consultation on short notice and retrospectively.

     Background

Friends of the Earth and two solar PV companies brought a successful judicial review (JR) challenge to the consultation. The Administrative Court decided that DECC’s proposal to cut FITs on 12 December 2011, 11 days before its consultation on that proposal closed (on 23 December 2011) was unlawful because it breached the statutory scheme for modifying FITs

In the meantime, many proposed smaller solar PV schemes under way were dropped or failed due to the uncertainty created by DECC’s October 2011 consultation announcement and the JR proceedings.

Civil claim for damages

In January 2013, 17 solar PV FITs installation, supplier and developer companies commenced civil proceedings against DECC claiming £140 million of losses resulting from DECC’s FITs 2011-12 solar PV tariff review. The claimants argued that they had been hit by cancelled orders and had to abandon solar PV projects due to DECC’s October 2011 consultation proposals announcement and its breach of the tariff modification procedure under the FITs statutory scheme.

Human Rights Claims

Article 1 of the first Protocol (A1P1) to the European Convention on Human Rights (ECHR) is a qualified right that provides that every natural or legal person is entitled to the peaceful enjoyment of their possessions. Therefore, the right extends to companies, because a company is treated at law as having a legal personality.

Because DECC had unlawfully interfered with the claimants’ possessions in breach of A1P1, the claimants are entitled to damages arising from concluded contracts

Contracts and losses protected by A1P1

  • Signed and concluded contracts were assets, and therefore “possessions” under A1P1. They were tangible, assignable and had a present economic value.
  • Unsigned contracts could not be possessions protected by A1P1. There is no authority for the proposition that an unsigned or incomplete contract is an asset. An unsigned or incomplete contract is no contract at all, intangible, non-assignable and absent present economic value.
  • Loss of future income is not a possession protected by A1P1, unless it has already been earned, or is definitively payable.
  • Goodwill may be an asset, and therefore a possession under A1P1, because it has been built up in the past and has a present-day value, as distinct from only being referable to events that may, or may not, happen in the future.
  • Loss of marketable goodwill caused by interference that at the time of the interference can be capitalised is, in principle, protected by A1P1. On the other hand, interference causing only a potential loss of goodwill for the future is a claim for loss of future profit and so not recoverable.

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Decision

Contracts that the claimants had entered into by 31 October 2011 and that were frustrated because of DECC’s October 2011 consultation proposal were an element of the marketable goodwill in the claimants’ businesses. Therefore, these contracts represented a possession protected by A1P1. The claimants could, in principle, recover for the loss of that element of the marketable goodwill in their businesses.

Even if the loss of unsigned or unconcluded contracts damaged the claimants’ goodwill, such losses are losses of future income and therefore not recoverable under A1P1.

As a matter of law and common sense, DECC’s publication of its October 2011 consultation proposal amounted to an interference with “possessions” under A1P1. DECC acted carefully, deliberately and unlawfully. It could not be characterised, as DECC argued, as “merely a proposal”.

Comment

This High Court decision on the preliminary issue is important:

DECC is potentially liable for claims of approximately £140 million due to its failure to comply with the FITs statutory scheme.

It provides a useful analysis of the extent to which commercial contracts and goodwill can be protected by bringing a claim under A1P1.

To establish an A1P1 claim for interference with possessions, it was necessary to show material economic consequences, due to state action.

The UK Government was liable for a Consultation Document, rather than a final decision.

The DECC indicated an intention to appeal.

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Brand owners win test case blocking injunction against ISP’s

In a landmark judgement on 17 October the High Court made orders blocking websites structured to infringe trade mark rights by selling counterfeit goods online.

Cartier International AG & Anr v. British Sky Broadcasting Limited & Ors, High Court of Justice, Chancery Division, HC [2014] C01382.

In a 266-page decision Mr Justice Arnold decided that five major internet service providers – the ISPs, (British Sky Broadcasting Group Plc, BT Group Plc, EE, TalkTalk and Virgin Media) should

“block or at least impede access”

by subscribers to six “Target Websites”. The websites were selling cheap replicas or counterfeit goods including jewellery and watches.

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The court held that there is a clear public interest in preventing the sale of counterfeit goods online and the Claimant had a

‘legitimate interest in curtailing such acivity [which] would not interfere with the provision by the ISPs of their services to their customers’.

Blocking injunctions are not new in cases of online copyright infringement. Orders have been made against ISPs by the English Courts in various cases in favour of film studios, record companies and the Premier League and regarding website indexing. However, until now, they have been made pursuant to s.97A of the Copyright, Designs and Patents Act 1988 (“CDPA 1988”) providing the High Court the power to grant injunctions against service providers, (taken as including ISPs) where that service provider has actual knowledge of another person using their service to infringe copyright.

There is no provision equivalent to s.97A CDPA 1988 in the Trade Marks Act. Richemont, the luxury brands company behind Cartier and Montblanc here relied instead on Article 11 of the Enforcement Directive (2004/48/EC which provides

“Member States shall also ensure that rightholders are in a position to apply for an injunction against intermediaries whose services are used by a third party to infringe an intellectual property right …”

The Court considered the UK’s implementation of the third sentence of Article 11 of the EU Enforcement Directive.

This was supposed to extend Article 8(3) of the Information Society Directive from just copyright to all forms of intellectual property, but the UK did not enact this into national law.

In defence, the ISPs argued that the UK’s failure to implement the third sentence of Article 11 of the EU Enforcement Directive meant that injunctions could not be granted based on trademark infringement. However Richemont claimed that Section 37(1) of the Senior Courts Act 1981, regarding injunctive relief was sufficient.

 

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Arnold J held that under the “Marleasing principle”(where courts must interpret national law in light of any relevant directive as far as it is possible), trademarks should be covered.

“I conclude that, even if the court would not have power to grant a website blocking injunction in a trademark case upon a purely domestic interpretation of section 37(1), section 37(1) can and should be interpreted in compliance with the third sentence of Article 11 by virtue of the Marleasing principle. If it were otherwise, the UK would be in breach of its obligations under the directive.”

In a 2011 report by Frontier Economics Ltd. quoted in the judgement, the sale of counterfeit and pirated products is put at approximately $960 billion a year by 2015.

COMMENT

Blocking injunctions are only one of various remedies available for brand owners to fight infringing websites e.g.

  • filing a domain name complaint if the website operates under a misleading name
  • disabling the website’s third party merchant services or online payment mechanisms
  • serving a takedown notice on the host of the offending content

The Judge said this was the first website blocking injunction against internet service providers awarded to a brand owner in the EU for a trademark infringement. This test is likely to be followed by other applications by Richemont and other trade mark owners, here and abroad regarding websites selling counterfeit goods.

If the ISPs are unsuccessful in any appeal, they would be unlikely to defend future cases, which could be brought using the simplified CPR Part 8 procedure.

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Professional Negligence: Court of Appeal underscores “reliance” essential for Negligent Misstatement

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Hunt & Ors v Optima (Cambridge) Ltd & Ors [2014] EWCA Civ 714

Overturning a judgment of the Technology & Construction Court, the Court of Appeal has decided that architects’ certificates  provided after the purchase of property could not be the foundation for negligent misstatement claims. The case restores the legal position limiting the duties of professional advisors. It also provides a helpful summary of the key components of claims against professionals, especially where consultants such as architects or surveyors are providing reports that are likely to be relied on by third parties, like purchasers, lenders and developers.

Background

The Claimants had bought flats on long leases. Later, serious defects were identified, and the Claimants sued the developer and a firm of architects for negligent misstatement. The developer had instructed the architects to inspect and certify the flats had been built to meet building regulations and that there were no defects. The reports were for consideration by the purchasers and their lenders within the conveyancing process. However, most of the certificates were not actually signed off until after exchange of contracts and for most of the purchasers, after completion.

 

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Original Decision

The judge at first instance held that the architects owed two freestanding duties of care in

  • carrying out the inspection of the flats with an architect’s skill and care
  • preparing accurate certificates.

This put a duty of care on the architects during the assessment stage, but before any report or representations. The judge found it no obstacle that the signed certificates were received by the purchasers only after exchange of contracts. The case appeared to widen professional duties more generally than previously understood.

Court Of Appeal’s Decision

Clarke LJ in giving the leading judgment said the earlier decision

‘…takes inadequate account of certain key principles….. reliance must follow representation…’.

Negligent misstatement

The CoA found that both reliance on the statement must be proved and further, that loss was suffered in consequence of the reliance. Here however, the purchasers could not have relied on the certificates when they exchanged contracts, because the certificates had not been completed by then.

Clarke LJ said that this

would involve imposing …. a duty to inspect arising out of statements which, at the time when the duty arose, they had not made“.

There was no separate duty owed to the purchasers for “negligent inspection”.

Warranty

Although the architects plainly owed contractual duties to its client, the developer, there was no implied contractual or tortious duty between the architects and third parties. The certificate itself stated that it was not a promise or guarantee. However, it is salutary to note that the architects did not apply for permission to appeal the awards made against them in favour of those purchasers who did receive certificates prior to proceeding with their purchase.

Conclusion

  • The previous understanding of the law has been reinstated. For liability to be established, a claimant has to prove that it suffered losses directly as a result of relying on a professional’s negligent misstatement.
  • The court was reluctant to imply collateral warranties between professionals and third parties.
  • Professional firms’ Terms & Conditions should specify that any duty is limited to providing the final report and does not extend to preparatory work.
  • Solicitors acting for purchasers (and lenders) must ensure such certificates or reports are finalised and signed before any contracts are exchanged or loan completedn completed.

 

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