Daughter cut out of will loses to animal Charities

hand-229777_150PIXABY

Supreme Court landmark decision:

The long awaited judgment in the saga of Ilott v Mitson & Ors[i] is a landmark decision by the Supreme Court. The result overturns the previous Court of Appeal judgment, which itself had caused shockwaves. It appeared to give almost no weight to the clearly expressed views of the late Mrs Jackson who did not want her only child, Mrs Illott to benefit from her £500,000 estate. Instead, she left everything to the animal charities. In a decision that will attract considerable attention, the Supreme Court has largely upheld the wishes of Mrs Jackson, and made serious criticisms as to the confused state of the present law, which led to such prolonged proceedings.

Background

In 2004, Mrs Melita Jackson died leaving a Will giving most of her £500,000 estate to Animal Charities. She had one daughter, Heather Illott. They had been estranged for 26 years. Heather had left home aged 17 to live with her boyfriend. Mrs Jackson disapproved. Mrs Jackson had left a detailed letter for her executors, explaining her decision to exclude Heather from her Will and that she had made it clear to Heather that she would receive anything under the will.

By the time of the latest hearing, Heather was in her 50’s and her husband had been made redundant. They were in receipt of benefits of around £13,000 a year, and their annual income totalled £4,665. The Court of Appeal said Mrs Jackson had been “…unreasonable, capricious and harsh.”

The Court of Appeal Decision

Mrs Illott was awarded £143,000 to buy the rented home she lived in. A further £20,000 was granted as ‘additional income’. This was a substantial increase beyond the £50,000 granted on an earlier hearing by a District Judge. She succeeded on her application for an award for maintenance under the Inheritance (Provision for Family and Dependants) Act 1975 (“IPFD”). The Court of Appeal stated that it was applying the law as set out in the statute, including considering all relevant factors under s.3, such as:

  • Financial resources and needs of claimant;
  • Financial resources and needs of any other claimant;
  • Financial resources and needs of beneficiaries;
  • Obligations and responsibilities of deceased towards claimants and beneficiaries;
  • Size and nature of estate;
  • Disabilities of claimants and beneficiaries;
  • Any other matter

Supreme Court Judgment

The Supreme Court highlighted errors in the approach by the Court of Appeal. Their order was set aside and the District Judge’s order restored.

Lady Hale in her judgment reviews the history of the Act and preceding legislation. She comments on the unsatisfactory state of the law, giving as it does no guidance as to the weight of the factors to be taken into account in deciding whether an adult child is deserving or undeserving of reasonable maintenance. The approach under the Act invariably involves a value judgment, which may be problematic as there is a wide range of opinion among the public and the judiciary about the circumstances in which adult descendants ought or ought not to be able to make a claim on an estate which would otherwise go elsewhere.

For an applicant other than a spouse or partner, reasonable financial provision is limited to what it would be reasonable for her to receive for maintenance only. This is an objective standard, to be determined by the court. The limitation to maintenance provision represents a deliberate legislative choice and demonstrates the significance attached by English law to testamentary freedom. Maintenance cannot extend to any or everything which it would be desirable for the claimant to have, but is not limited to subsistence level. The level at which maintenance may be provided is clearly flexible and falls to be assessed on the facts of each case, as at the date of hearing.

Although maintenance is by definition the provision of income rather than capital, it may be provided by way of a lump sum. As to the first suggested error, the process suggested by the Court of Appeal is not warranted by the Act. The Act does not require the judge to fix some hypothetical standard of reasonable provision and then increase or discount it with reference to variable factors. All of the s.3 factors, so far as they are relevant, must be considered, and in light of them a single assessment of reasonable financial provision should be made.

The District Judge worked through each of the s.3 factors, and was entitled to take into account the nature of the relationship between Mrs Jackson and Mrs Ilott in reaching his conclusion. As to the second suggested error, the District Judge specifically addressed the impact on benefits twice. The Court of Appeal’s criticism that his award was of little or no value to Mrs Ilott was unjustified.

Reasonable financial provision can in principle include the provision of housing, but ordinarily by creating a life interest rather than a capital and inheritable sum, which possibility appeared not to have been considered by the Court of Appeal.

To the extent that the benefits means test was relevant, it was likely to apply also to the additional sum of £20,000 apparently awarded with a view to avoiding that test. The statement in the Court of Appeal that a claimant in receipt of benefits should be treated in the same way as a disabled claimant was problematic; what must have been meant was that receipt of means tested benefits is likely to be a relevant indication of a claimant’s financial position. Finally, the Court of Appeal’s order gave little weight to Mrs Jackson’s very clear wishes and the long period of estrangement. The Court of Appeal’s justification for this approach was that the charities had little expectation of benefit either.

Lady Hale said this approach should be treated with caution, given the importance of testamentary bequests for charities, and because the testator’s chosen beneficiaries, whether relatives, charities or otherwise, do not need to justify their claim either by need or by expectation.

COMMENT

Media comment had seized on the Court of Appeal decision, fearing that people’s wishes in their Will are not being followed. The Supreme Court judgment should now reassure those concerned that the courts were unduly interfering in the wishes of testators about who should inherit. The judgment provides more clarity for those involved who may object to a decision made by a relative to exclude them from the Will and also for those, executors and beneficiaries alike, involved in issues concerning “reasonable financial provision” when a challenge to a Will is being considered.

The Court has to decide whether the Will makes

“reasonable financial provision”

according to IPFD, for the adult child of the deceased. The trial judge is not exercising a discretion in reaching a decision, but making a value judgment based on an assessment of the statutory provisions which have to be taken in to account. It is solely the Act which sets out the factors for the exercise of the court’s decision.

  • Based on this judgment, people are still entitled to cut their children out of their Will if they wish. However, there will have to be good reason shown. How and why they are making other provision needs to be explained, and what their connection is to any particular charity to which they wish to leave their estate.

In view of the Supreme Court’s guidance on IPFD:

  • The upshot is likely to be that adult children who have been excluded may now be less encouraged than suggested by the Court of Appeal decision to dispute a Will by arguing that they have not been left reasonable financial provision.
  • The Court will still take in to account any accompanying letter of wishes. If anything, these may now be more important than before, and this case can be seen in the context of its own particular and quite unusual circumstances.

 


[i] https://www.supremecourt.uk/cases/docs/uksc-2015-0203-judgment.pdf

This piece has previously appeared at http://social.luptonfawcett.com/blog/daughter-cut-out-will-loses-animal-charities

scales-145464_150pixaby

 

Directors & Shareholder Claims: 3

????????????????????????????????????????????????????????????????????????

Understanding the options – 5 tips

As discussed in previous posts, Boardroom and shareholder disputes arise for many reasons. When they do, it is important to understand the legal rights of all parties and the options available. The consequences of allowing things to drift and potentially get worse shouldn’t be ignored. There are options which help make life easier.

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the third of this series, here are five important tips:

golden-font-number-five-6577565

1] Shareholder Agreements

The House of Lords in Russell v Northern Bank Developments Corp Ltd[i] emphasised the practical utility of Shareholder Agreements. These are used for a wide variety of purposes, adding significantly to the company’s constitutional regime of Memorandum and Articles. This includes providing personal rights to minority shareholders who otherwise have no control over fundamental points.  The minority shareholder’s concerns would be more difficult to deal with unless specifically covered as an enforceable private contract between members.

These should be provided in the Shareholder Agreement, covering similar areas to partnership agreements.

The benefits include avoiding future misunderstandings and practical difficulties in running the business.

A Shareholder Agreement typically deals with issues such as:

  • restrictions on transferability of shares
  • lack of a market for sale of shares
  • establishing a purchaser
  • formulas for valuation and funding
  • pre-emption rights
  • compulsory transfer or option arrangements
  • protection of minority members by permitting a veto
  • preserving confidentiality
  • efficient transfer on death, disability, retirement
  • estate planning
  • regulating management and involvement of investors
  • mechanisms for dealing with stalemate.

social-justice_312132658_std

2] “Unfair Prejudice” Petition
Section 994 of the Companies Act 2006 permits a shareholder to petition the court on the basis that the shareholder’s interests have been unfairly prejudiced in the conduct of the Company’s affairs due to e.g. breach of:

  • the Articles of Association
  • the Shareholder Agreement
  • fiduciary duties by directors
  • exclusion of a minority from the running of the company in small “quasi-partnership” companies.

The Court has wide discretion to grant the relief it decides is appropriate. This is often an order that the aggrieved minority shareholder’s shares are purchased for ‘fair value’. This may include a premium on the actual value of the shares as recompense to the petitioner for any wrongdoing by the majority.

3] What is a ‘derivative claim’ – S.260 of the Companies Act 2006?

In certain circumstances a shareholder can ask the court to prevent action being taken by the Directors which is harmful to the company, or make a claim against the Directors for any loss suffered by the company as a result of their action.  The claim must be made by the shareholder on behalf of the company. The shareholder’s right to bring a claim “derives from” the company. This is a claim made in a “representative capacity” by the individual shareholder, not on the shareholder’s own behalf. It is the company which is suffering the harm.  The damage to the company may also harm the shareholder indirectly, e.g. if there is a reduction in profits or other damage suffered.

Derivative claims are relatively unusual because although it is the member who issues the court proceedings as claimant to launch the action, the court must give permission for the claim to continue to trial.  A number of tests have to be satisfied before the court will give permission.

The shareholder runs a risk on costs and at least initially has to fund the claim themselves. It is possible to obtain an order that the company indemnify the member, although they may obtain no immediate benefit themselves by launching the court case. However, if the claim succeeds, the company will have been protected. Ultimately, that should benefit the shareholder because it protects their investment in the company.

conflict-resolution-modified-one-way-street-sign-indicating-38632546

4] What is a claim under S.122(g)  of the Insolvency Act 1996?

Any shareholder may apply to have a company wound up on “just and equitable grounds” including in quasi-partnerships, involving the shareholder’s right to manage the company – Ebrahimi  v Westbourne Galleries Ltd[ii]. The sole remedy here of winding up is draconian, available only in specific circumstances. This is the “nuclear option” in shareholder disputes – the aggrieved shareholder petitions the court for a winding up order to terminate the company.

Usually the shareholders’ differences have become irreconcilable and a ‘commercial divorce’ is the only way to move forward. When a company is wound up, if there is anything left after paying the creditors and the liquidator the proceeds are divided amongst the shareholders.

Not every aggrieved shareholder will be able to justify a winding up petition to the court. There must be compelling reasons showing that the company can no longer continue.  The aggrieved shareholder has to prove there will be a concrete benefit in making a winding up order.  If there is some alternative remedy, which would allow the company to continue, the court may refuse to make the order.

A typical scenario where a winding up may be justified is where there is deadlock or stalemate between two or more shareholders in a quasi-partnership company which can’t be resolved. Where there is an aggrieved minority shareholder, experience shows that the majority shareholder will seek to dispute:

  • the complaints by the minority that there was any “quasi-partnership” in the first place
  • the circumstances of any alleged unfairly prejudicial conduct
  • the alleged value of the business
  • the aggrieved minority shareholder’s share

legal-advice-dice-11528776

5] Finally

The sooner informed negotiations start, the more likely it is that a private business will survive a shareholder dispute. A comprehensive Shareholder Agreement can help to preserve operations and resolve matters quickly.

Expert legal advice early on could keep the process out of prolonged, expensive and destructive litigation. This is by providing the facts, insight and information to allow all parties to make informed decisions quickly. This would ultimately be to the benefit of the company as a whole and the shareholders individually.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

[i] [1992] 1 WLR 588

[ii] [1972] 2 All ER 492

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

Service of a Claim Form on a Director

WHEN DIRECTORS FALL OUT

Disclaimer

scales-145464_150pixaby

Directors & Shareholder Claims: 2

??????????????????????????????????????????????????????????????????????????????????

Resolving Boardroom Conflict  – 5 More Tips

Disputes between shareholders of private companies are often emotional and can be as complicated as a personal divorce. The disruption to any business can be extremely damaging. Knowing what remedies are available to resolve matters quickly could be the key to survival.

  • What if the majority is taking unfair advantage of you?
  • What if you suspect co-shareholders are stealing from the company?
  • In the second of a series, here are five further important pointers to be aware of:

1/ Protecting the Minority

There is a common misconception that the complex laws and regulations relating to companies should achieve a just and fair relationship between a minority shareholder and the majority. However, there is very little law which protects the minority, unless the parties have agreed beforehand.

Differences between shareholders don’t always arise because of power struggles or personal animosity. Frequently, disputes are down to differences in approach where one party wants to retire or withdraw their investment. Disagreements may centre on

  • timing
  • valuation issues
  • the direction of the company

The public courts are unlikely to be the ideal venue for resolving shareholder disputes. Proceedings are in the public domain and the procedure can be expensive and slow.

Particularly where private companies are concerned, there are effective alternatives, including: negotiation, mediation and arbitration.

30gratisography

2/ Shareholder Agreement

An effective way to address potential problems before they arise is a Shareholder Agreement. This sets out ground rules for the shareholders in given circumstances. Many potential and predictable problems can be addressed in advance in a Shareholder Agreement. This leaves the shareholders to concentrate on managing the business, rather than a future internal dispute.

Amongst other things, the agreement can cover:

  • management responsibilities
  • non-competition restrictions
  • bonus and remuneration formulae
  • approval/decision process for major corporate decisions
  • buy/sell provision – e.g. a “shotgun clause” to force a transaction
  • how a shareholder can realise his or her investment in the company
  • whether to impose any restrictions on selling shares
  • criteria on valuing the shareholding
  • exit provisions – timetable for sale
  • appointment of an independent third party to value the shares
  • a detailed dispute resolution framework

 

conflict-resolution-modified-one-way-street-sign-indicating-38632546

3/ What is an “Unfair Prejudice” claim?

The majority shareholders are in a powerful position, even where there is a Shareholder Agreement. However, the court will protect the position of minority shareholders from being abused in certain circumstances.

Section 994 of the Companies Act 2006 allows a shareholder to apply to the Court for an order declaring that the affairs of the company are being conducted in a manner unfairly prejudicial to the minority shareholder’s interests. If the court agrees, it will usually order that the shares of the minority shareholder are bought for fair value. However, the Court has a very wide discretion as to what it can order, including:

  • purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself, the reduction of the company’s capital accordingly
  • conduct of the company’s affairs in the future
  • company to refrain from doing or continuing an act complained about, or to do an act about which the petitioner has complained that it has omitted to do
  • civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct
  • company not to make any, or any specified, alterations in its articles without the court’s permission

4/ When might a court find “unfair prejudice”?

Where a minority shareholder believes that the company is being run in a way which is unfairly prejudicial to some of the shareholders, the aggrieved shareholder can make an application to the Companies Court for a remedy. Unfairly prejudicial conduct may include for example:

  • majority shareholders paying themselves excess remuneration
  • majority shareholders failing to pay dividends
  • breach of duty by diverting business to majority shareholders or their connected companies
  • directors selling or buying assets at an unfair price
  • failing to pay declared dividends
  • undertaking activities which are not permitted under the company’s Articles
  • doing something which might result in the company’s insolvency
  • failure to follow company law or proper procedure on meetings.
  • failure to issue annual accounts

 legal-consultation-isolated-line-art-logo-design-40111061

5/ “Quasi-Partnership”

In small to medium sized private companies, the court might be persuaded that a “quasi-partnership” exists. The aggrieved party may complain that there is a breach of their ‘legitimate expectations’ about what the company was set up to do, and how it would be run. E.g.

it was agreed, or a common intention is proved:

  • the company would carry on a particular business
  • all would be entitled to an equal say in how the company is managed
  • a mutual expectation of continued employment
  • the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out

If the court decides that a quasi-partnership exists, termination of that arrangement or unfair prejudice to the minority may result in the majority being obliged to buy out the shares of the aggrieved minority shareholder. If the majority acts in breach of such

“legitimate expectations”

the court may intervene.

Where an aggrieved shareholder has cause for complaint, urgent action is required. The court may refuse to interfere if a minority shareholder let the matter slide. The court will treat this as acceptance of the action taken by the majority:

“delay defeats equity”.

The court will consider all of the background circumstances on an application, including the minority shareholder’s own conduct.

These applications are rarely straightforward and are often settled by negotiation before the court is asked to make a final decision.  Quite often, one or more of the shareholders leave with a package.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

scales-145464_150pixaby

Directors & Shareholder Claims: 1

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

WHEN DIRECTORS FALL OUT

Disclaimer

 

 

 

 

Directors & Shareholder Claims: 1

How to break the deadlock – 8 tips

ball-244222_150pixaby

Boardroom and shareholder disputes can arise for many reasons. When they do, it’s important to understand the legal rights of all parties and the options available as well as the consequences of allowing things to get worse. However, there are some options which can make life easier:

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the first of a series, here are seven important pointers to be aware of:

1/ Minimal Influence

In company law, a minority shareholder (anyone with 49% or less) has minimal influence over the management of the company or the distribution of its profits.  The standard constitution of a company and rules under the Companies Act give little protection to a minority shareholder.

Differences can and do arise as the business evolves and personal circumstances change:

  • there may be differences on strategy or the direction of the company
  • power struggles and poor personal relationships may develop
  • shareholders may wish to retire or disagreements occur on service contracts and remuneration.

There are ways in which the minority shareholder’s interests can be protected, either by agreement with the other shareholders or as a last resort by taking action through the courts.  It is easy for entrepreneurs to preference the initial brokering of a deal, and getting the new business up and running, over longer term, but equally important considerations.  But it’s always advisable to consider these scenarios at the beginning.

2/ Shareholder Agreements

A shareholder agreement is a must for a private company, especially where there are a relatively small number of shareholders who also manage the business. These don’t always arrive without (you) the minority shareholder/s pressing for one. You need to proactively pursue this as part of the start up, or failing that, you should put it at the  top of the agenda.  In a Shareholder Agreement, the majority shareholder usually gives up some rights to the minority.

The process of preparing the Agreement helps shareholders address points which could become potential problems. This encourages the key players to work through the issues early, when everyone is positive and communications are still good.

It’s much more straightforward and economic to deal with this as part of the start up, rather than risk the expense and uncertainty of going to court later.  All concerned will know where they stand where there is a Shareholder Agreements. It reduces the risk of conflicts arising or getting out of hand.

An existing businesses can certainly set up a Shareholder Agreement at whatever stage in its evolution, for example when one of the main shareholders is considering retiring or their circumstances have changed.

It is also worth remembering that a Shareholder Agreement

  • is confidential
  • doesn’t have to be filed at Companies House
  • sits behind the company’s public face
  • is a private document between the shareholders.

 

euro-76019_150pixaby

3/ Points to Cover

A Shareholder Agreement can go a long way to ensuring disputes are avoided or at least, provide the mechanism that allows them to be settled quickly. An agreement identifies shareholders’ specific responsibilities and outlines how and where disputes are to be resolved. For example, it can specify forced buy/sell provisions during a dispute and even include a formula or other means to determine the transaction price.

Amongst other things, the Agreement can cover:

  • key objectives
  • financing and borrowing
  • dividends, directors’ fees and salaries / profit distribution
  • controls on the appointment of Directors
  • major expenditure
  • exit mechanisms – for shareholder deaths, misconduct, divorce, incapacity, etc.
  • fair valuation process for transfer of shares
  • succession arrangements – insurance of key persons
  • dispute resolution

The Shareholder Agreement gives minority shareholders a say in the business and some security. Without one, the minority would have little impact on decisions regarding the company and protecting their interests.

4/ How to enforce my rights as a shareholder?

Negotiation is the key, this should be explored first, rather than threatening legal action. However it is important to know your legal rights, and the provisions of the Company constitution.

  • How do these apply to your position and the other interested parties?
  • It may be necessary for you to obtain details or documents as part of the process, which the company is reluctant to provide.
  • Take legal advice early on as to the pros and cons, the likely outcome, and the likely timescales and costs

Even where proceedings are issued, frequently a solution is reached through negotiation. This is usually much quicker and cheaper than having a decision imposed by the court. However, it may be necessary to exercise leverage by relying on your strict legal rights to achieve any progress.

street-sign-141396_150pixaby

5/ Solutions

There are various options, including:

  • proposing a resolution at a general meeting which redresses the situation
  • complaining to the police of any criminal acts
  • asking the board of directors to take action in the company’s name against an individual director (because the shareholders can’t sue in the company’s name)
  • using a mediation service to settle a dispute.

6/ Mediation

A mediator will be someone who is experienced in this area of law.  If agreement is reached with the help of the mediator, the compromise can be recorded in a legally binding document which can be enforced in the court, if one of the parties breaks it. The advantages of mediation include its relative cheapness compared to going to court, privacy (there is no public record) and speed.

If it isn’t desirable or possible to achieve an accommodation where the aggrieved shareholder stays in the company, other solutions include:

  • the other shareholders buy out the aggrieved shareholder at a fair price
  • the company buys back the aggrieved shareholder’s shares at a fair price
  • Make a reasonable offer to the aggrieved shareholder.

7/ Further Options

Where the Company refuses to cooperate, further options include:

  • applying to the court for an order that the company is acting or has acted unfairly (an “unfair prejudice” action under s.994 Companies Act 2006)
  • applying to the courts for the company to be wound up under s.122 of the Insolvency Act 1996
  • suing the directors for negligence by means of a Derivative Action under s.260  of the Companies Act 2006:

The courts encourage settlement of all disputes, including shareholder disputes. Where the majority has made a reasonable offer to the aggrieved minority shareholder to buy them out on reasonable terms, it is unlikely that the majority will have acted ‘unfairly’. Then it wouldn’t be ‘just and equitable’ to wind the company up. It is essential to take advice on the terms of any offer you make.

If you offer to go to mediation or alternative dispute resolution, you are also unlikely to have acted unfairly. However if the company is in financial difficulties a creditor may issue a petition under S.122 of the Insolvency Act, irrespective of the shareholders’ wishes.

imagesCAQOQBJ4

8/ Finally

Where the Court decides that a minority shareholder has been oppressed or unfairly prejudiced and the appropriate remedy is for the majority buy the minority shares, this is often done at a “fair value” i.e. fair market value, without deduction for a minority discount.

Where the majority gives an undertaking to buy the shares of the aggrieved minority at fair value, usually the court will adjourn the unfair prejudice petition.  However, the fundamental battle ground is frequently

  • the basis of the business valuation
  • the underlying assumptions
  • the data and criteria on which it is based.

The valuation of a private company is an area of potential significant difference between the parties. These can be quite complex disputes, but qualified and experienced legal advisors and valuation experts hired early in the process will help you through this potentially sensitive and difficult area.

paul.sykes@luptonfawcett.law

Disclaimer

LINKS

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

 

scales-145464_150pixaby

 

 

 

M&S’s Break Clause Dispute: wider contract implications

????????????????????????????????????????????????????????????????????????????????

See my blog on the Supreme Court’s recent decision:

http://www.luptonfawcett.com/blog/mandss-break-clause-dispute-broader-contract-implications/

  • Contract interpretation
  • Implied terms
  • Necessity
  • Break clauses

This updates last year’s wordpress piece:

https://jpaulsykes.com/2015/01/06/supreme-court-gives-ms-permission-to-appeal/

 

scales-145464_150pixaby

Shareholder and Boardroom Disputes: Tips (2)

images CALM GOLDEN RULES WHITE

In the second in a series of articles, read my piece in the link below on:

http://www.luptonfawcett.com/blog/minority-shareholder-boardroom-disputes-tips-2/

  • Minority Shareholders
  • Boardroom Disputes
  • Shareholder Agreements
  • Unfair Prejudice claims

scales-145464_150pixaby

Shareholder & Boardroom Disputes: Tips (1)

imagesCA8KW2NT GOLDEN RULES RED

In the first of a series of articles, read my piece in the link below on:

  • Minority Shareholders
  • Boardroom Disputes
  • Shareholder Agreements
  • Unfair Prejudice claims

http://www.luptonfawcett.com/blog/minority-shareholder-boardroom-disputes-tips-1/

 

scales-145464_150pixaby

The Battle of the Forms: Part 2

  • Tips
  • 15 Practical Steps

 ballet-545323_640

In Part 1 “Terms Agreed – but whose terms?” http://wp.me/p4DFLr-8x we examined the perennial problem of the steps necessary to include your companies’ standard contractual terms and conditions (T&Cs) in to a contract.

This was the issue recently covered by the Technology and Construction Court in the case of Transformers & Rectifiers Ltd v Needs Ltd. In that case, neither party to the contract had done sufficient to ensure that their T&Cs were drawn to the attention of the counter party. The court applied the law deciding that in a sale of goods contract where neither the seller’s nor the buyer’s terms and conditions have been incorporated, the relationship is governed by the implied terms of the Sale of Goods Act 1979. Accordingly, the seller of the goods will not be able to exclude or limit its liability for defective goods, which a seller can normally restrict by contract subject to the reasonableness test in the Unfair Contract Terms Act 1977.

In the preliminary discussions between parties, a “battle of the forms” can arise when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own terms. A typical example is where, e.g., a Buyer offers to buy goods from the Supplier on its (the Buyer’s) standard terms and the Supplier purports to accept the offer on the basis of its own standard terms. In this scenario, the battle is often won by the party who fired the “last shot”, i.e., the last party to put forward T&Cs that were not explicitly rejected by the recipient.

A business should ensure that its terms are incorporated into its contracts. To achieve this, terms and conditions should be provided with and/or referred to in pre contractual documentation, such as quotations and orders. A business that relies upon printing their terms on delivery notes or invoices (post contractual documentation) runs the risk that it will not be able to rely upon those terms if there’s a dispute.

Below are a series of practical steps that could be considered to gain the advantage, the key theme being that parties must be clear about the terms on which they are doing business. Although these steps won’t guarantee your company’s standard T&Cs prevail, they may give you an advantage. There is no single overriding rule that trumps all in battle of the forms cases, but the following should help:

30gratisography

Negotiating Tips:

“Prevail clauses”

Consider including a “prevail clause” in your T&Cs, stating e.g. that your standard T&Cs are incorporated in to the contract to the exclusion of any other parties’ T&Cs, and that your standard terms prevail. This won’t necessarily succeed alone, e.g. where the other side makes a counter-offer, your standard T&Cs including the prevail clause will be by-passed and won’t form part of the contract. This is because your T&Cs will have effectively been rejected by your counterparty and replaced by their counter-offer.

“Prevail clauses” are still used, including as a means to pressurize the other side in to taking the line of least resistance, and accepting the standard terms as a fait accompli. However, a belt and braces approach is safer. Where the other side aims to rely on such a clause it is perfectly reasonable to reply by reiterating that your T&Cs apply.

  • Written records should be kept of all contract negotiations. Ideally, minutes of meetings should be signed by all present.
  • Emphasize that no contract can be agreed until any disputed terms are ratified. Stipulate which terms are outstanding.
  • A contract can be concluded verbally. Ensure that any meetings or telephone calls are confirmed as being conducted on the basis of your company’s T&Cs, or “subject to contract”; to prevent any agreement before a written contract is signed.

??????????????????????????????????????????????????????????????????????????????????????

Practical Steps

  1. Always send the other side a clear and legible copy of your T&Cs together with your order/acknowledgment / supply forms and state clearly on the face of your order/acknowledgment that you rely on those T&Cs.
  2. When writing to the other side to agree an order, include a copy of your T&Cs with the letter or email. Stipulate that you are offering to contract on those terms.
  3. Don’t take for granted that your T&Cs apply. Although you may have been doing business with the other side for several years, don’t assume that a court will accept it’s on notice of your standard T&Cs. Whenever you enter into a contract, ensure that your T&Cs are included.
  4. If you send a purchase order/invoice electronically, make sure you don’t omit the back page setting out your standard T&Cs. Ideally, attach a copy of your T&Cs as a separate document.
  5. Actively bring the counterparty’s attention to your standard T&Cs.
  6. Alert the other party on the front page of your pro forma documents such as purchase order/invoices, email or letter footers, to your standard T&Cs and where they are found, e.g. on your website, and / or as attached.
  7. Clarify in writing that your T&Cs are the only terms upon which you are prepared to do business.
  8. Avoid a battle of the forms. If the other side responds with their T&Cs, clarify by return firstly that you don’t accept their terms and secondly, your T&Cs represent the only contractual provisions on which you will proceed.Respond to / reject counter-offers.
  9. If the counterparty replies to your offer ambiguously or doesn’t accept your offer, the court may later treat their communication as a counter-offer, which if it is treated as the last shot, could prevail.
  10. Contracts can be concluded by performance. Avoid premature acceptance of the other side’s T&Cs by conduct. E.g., terms of a contract can be finalized by one side unintentionally accepting the terms of a draft agreement before formal approval or signature. This could be by supplying or paying for the goods or services, accepting delivery of goods, or acting otherwise in line with the terms of the counterparty’s draft contract.
  11. Be aware that if one side proceeds without a clear written agreement and performs the contract, they risk a deemed acceptance of the other party’s terms.
  12. Fire the last shot in the “battle”! The other side’s T&Cs could prevail if they were the last shot, or where they were sent to you and, they weren’t rejected, answered with a counter offer, or where the contract was performed without more.
  13. A tactic that worked in B.R.S v Arthur V. Crutchley Ltd was where the supplier delivered whisky to the buyer’s warehouse. The delivery note set out the supplier’s T&Cs. However, the buyer’s warehouseman stamped it  “Received under [the buyer’s] conditions”.      The Court’s decision was that the warehouseman’s rubber stamp constituted the last shot of the battle. The buyer’s T&Cs prevailed. The stamp represented a counter-offer which the supplier was taken to have accepted by its performance in handing over the goods.
  14. The safest policy is to identify and resolve any dispute about T&Cs directly in negotiations with the other side. However, there may be the temptation not to jeopardies a prospective deal or future custom by risking controverersy. This involves what may be a greater risk down the line of the T&Cs being unclear, with an argument as to whose apply, or whether neither applies.
  15. Specifically negotiating the terms avoids the uncertainty of putting this off. If the seller’s T&Cs are accepted, then agreed variations can be set out in a side letter. On the up-side, when agreement is reached in this way, everyone knows where they stand legally. The down-side is that negotiating the contractual terms may be costly and time consuming. 

A well drafted set of terms and conditions will take into account the manner in which a business operates, and what it hopes to achieve. Your legal adviser should take the time to understand your business to ensure that your contracts achieve what you want them to.  

Advice at the beginning can avoid pitfalls down the line, which could be expensive and involve court proceedings.

 Cases:

Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC).

British Road Services Limited v Arthur Crutchley & Co Limited ([1968] 1 All ER 811).

 scales-145464_150pixaby

 

New Professional Negligence Pilot: Adjudication

  ????????????????????????????????????????????????????????????????????????????????????

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.

conflict-resolution-modified-one-way-street-sign-indicating-38632546

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.

PNLA logo

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.

scales-145464_150pixaby

 

 

 

 

 

 

 

 

 

 

8 Ways to avoid a Business Dispute

?????????????????????????????????????????????????????????????????????????????????????

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.

 

?????????????????????????????????????????????????????????????????????

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.

scales-145464_150pixaby