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Company - Law for Commercial Businesses
The Companies Act 2006 in England was fully implemented on 1 October 2009. It has 1,300 sections and 16 Schedules which cover formation to dissolution of a company. Changes were made to English company law in relation to company constitution, corporate structure, share capital, shareholder rights, duties of directors, directors and corporate management, meetings, company procedures, communications and legal compliance. The Act is organised into 47 Parts and provides model articles of association for private and public companies. Most of the regulations that constituted default articles or regulations in Table A constitution of a company under the Companies Act 1985 are now enacted or modified in the 2006 Act. The Model Articles for a private limited company can be adopted and modified by a company and should be accompanied by a shareholders agreement if there are two or more shareholders. The Act sets out the way a company communicates with its shareholders, including electronic communications in Part 37 and Schedules 4 and 5. Notices, timings, place, meetings, voting in relation to resolutions, meetings and record keeping for a company are found in Part 13 of the Companies Act 2006.
Directors - Company Management
Directors of a company may be held personally liable for breach of the duties imposed on them by common law, statutory law or their director's service agreement or contract. A short summary of the directors statutory duties in relation to his or her conduct and actions is set out below. Directors of a company are subject to the codified statutory duties in Part 10 of the Companies Act 2006. These legal duties replace directors' fiduciary and common law duties previously derived from English case law. The exposure to personal liability for company directors have increased and the scope and extent of each codified statutory duty will be subject to court interpretation and case law decisions. The directors' duties are owed to the company and not to the company shareholders. In a breach, these statutory duties can be enforced by shareholders on behalf of the company in derivative proceedings in court. Directors can remain personally liable during and after company insolvency proceedings under some circumstances and legilsation including provisions in the Insolvency Act 1986 which can result in a court orders for recovery. payment or contribution from the director's personal assets and property.
Shareholders - Company Owners
Shareholders (or Members) of a company may rely on Parts 8 and 9 of the Companies Act 2006 in claims they may have against errand company directors. Derivative actions are claims by shareholders, acting on behalf of their company, against the company directors for wrongs committed against the company. This is possible because an incorporated company is a separate legal person which can sue and be sued in legal proceedings. The circumstances in which shareholders can bring derivative proceedings include the director's negligence, breach of duty or trust. Proceedings can also be brought against third parties who have benefited from the director's default, negligence or breach of trust. Part 11 sets out provisions for derivative claims and proceedings by shareholders. Flexibility has been provided in cases involving shareholders disputes, shareholders rights and directors' corporate mis-management. Derivative claims are subject to a two stage procedural filter by the court. See below for derivative claims, unfair prejudice claims, winding up on just and equitable grounds and shareholder agreement disputes.
Where the shareholders are also the directors of a company, disputes can arise from non-aligned personal and commercial interests. Where the shareholder directors hold equal shares, deadlock situations can occur. Part 30 of the Companies Act 2006 provides shareholder protection against unfair prejudice. In some circumstances, depending on the facts, it may be preferable for a shareholder to bring a derivative claim in connection with a petition to the court for unfair prejudice on grounds that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of shareholders generally, or some part of the shareholders of the company (including himself), or an actual proposed act or omission of the company is or would be so prejudicial. Unfair prejudice may also be considered in cases where there is a breakdown in the relationship between shareholders in a shareholders deadlock situation or in a shareholders dispute.
How we help clients
If you are a shareholder or director in a commercial company, you may need to review our company articles of association and the terms in your shareholder agreements to ensure that these comply with the Companies Act 2006. If you need advice on your rights, powers, duties and liabilities or require court litigation representation or help with settlement negotiations, you can contact us at James Chan & Co for legal advice and representation.
Directors - Companies Act 2006
A director is defined as including any person occupying the position of a director, by whatever name called, including a shadow director. The statutory duties apply regardless of the terms in a director's service agreement. With statutory duties come liabilities and directors are exposed to risks from personal liabilities and shareholder claims.
Individuals offered the position of a company director need to consider, apart from personal, commercial benefits and interests, attendant responsibilities and potential legal liabilities and risks which company law imposes. As the scope of these statutory duties are wide, and some personal to the director, it is unlikely indemnity insurance cover will afford the director full protection. The statutory duties will be subject to litigation in the Companies Court for years to come.
Every commercial company must have on its Board of Directors at least one director who is a natural person for the purpose of being held responsible and accountable for the actions or omissions of the company. Section 155 of the Companies Act 2006 abolishes boards of directors that comprise solely of corporate directors or one corporate director Board companies, common in Group company parent and subsidiary structures. A breach will result in a fine on the company and any officer in default. Companies with group and subsidiary structures should review their board constitution and if necessary, an individual person should be appointed to the board of directors with necessary alterations to the company articles of association made.
The duties owed by a director to his company and its members are now codified in sections 171 to 177 of the Companies Act 2006. These place on directors legal duties which require them to act within the powers given in the company articles of association, promote the success of the company, exercise independent judgment and exercise reasonable care, skill and diligence in company business matters, avoid conflicts of interests, not accept benefits from third parties and declare personal interests in transactions or arrangements with the company.
The following is a summary of the directors' statutory duties codified in the Companies Act 2006 which serves as a guide. The law giving rise to these duties and its interpretation is expected to develop through court litigation. You should always seek legal advice from a solicitor as to your specific circumstances since the facts of each individual case is different and personal to your situation.
Directors to act within Company Constitution
This is currently interpreted to mean directors must act within the powers given to them in the company's constitution or articles of association and they can only exercise these powers for the purposes for which these were given. Directors who are not familiar with the provisions of their company constitution run the risks of acting outside their powers and therefore acting in breach of their statutory duty. Directors should review and, if necessary and with the consent of shareholders, amend the company articles of association to ensure they are able to comply with their statutory duties in accordance with company law. We offer an audit, review and advice service to clients. You can contact us with your requirements.
Directors to Promote the Success of the Company
Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders. In exercising this statutory duty, the directors must have regard (in addition to other considerations) to the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster relationships with suppliers, customers and others, the impact of the company's operations on the community & the environment, maintaining a reputation for high standards of business conduct and the need to act fairly as between shareholders of the company. This statutory duty under company law is wide and likely to increase litigation involving liability for directors. We can advise board members on the management of such risks.
Directors to exercise Independent Judgment
In addition to acting within the authority of the company's constitution, directors must exercise independent judgment or freedom of thought. A director should not therefore be influenced by the will of others, such as shareholders or other directors. Difficult situations arise if a director were to act in accordance with an agreement, duly entered into by the company with a third party that restricts the future exercise of discretion by its directors or where the terms in a shareholders agreement imposes on a shareholder, who is also a director, to act in a particular way given particular trigger events. What if two director shareholders differ in their independent judgments as to whether their company is to be put into administration or liquidation? If you encounter such situations which are bound to give rise to dispute and potential litigation, we will be pleased to take instructions to advise and, if necessary, represent you in litigation proceedings.
Directors to exercise Reasonable Care, Skill and Diligence
The provision of this statutory duty appears to have been extracted from section 214 of the Insolvency Act 1986 which relates to wrongful trading and liability of directors and other persons to contribute to a company's assets. An objective test and then a subjective test is used and applied in the determination of liability of directors under company law. A director is required to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and the general knowledge, skill and experience that the director has.
Directors to avoid Conflict of Interests
Directors are required by law under Section 175 to avoid situations in which he has or can have or possibly may have a direct or indirect conflict of interests with his company. This includes but is not limited to exploitation of any property (probably including existing or future intellectual property), information or opportunity. This statutory duty is extended to cover the interests of connected persons of directors including spouses, civil partners, children and parents. This duty could cause problems for a majority shareholder appointing a director to the board of a joint venture. There are exceptions to this duty and private companies incorporated on or after 1 October 2008 may have a potential conflict of interest authorised by the board of directors following disclosure. This raises potential legal problems which could open the director concerned or the other board members to claims from shareholders of the company.
Directors not to accept Benefits from Third Parties
This duty applies to all manner of benefits which may be reasonably regarded as giving rise to a conflict of interest. The use of companies for provision of services to directors of a company where one or more of the directors have interests, will be deemed not only a conflict of interest situation but also a benefit conferred on the director or directors involved in breach of Section 176. There may also be issues of constructive trust and unjust enrichment arising from such situations.
Directors to Declare Interest in Transactions or Arrangements with the company
Whilst a director's duty under Section 175 is to avoid a conflict of interests, Section 177 requires a director to actively declare an interest in a proposed transaction or arrangement with the company to the Board. This duty is extended under Section 182 to declare an interest in an existing transaction or arrangement with the company. As with the duty to avoid conflicts of interests, a director must consider the interests of connected persons. There is a declaration regime to be followed. We will be pleased to advise you of the procedure and potential risks arising, particularly in commercial transactions.
How we help clients
Directors can take a proactive approach to management of their commercial business and protection of investors. If you are a director or a shareholder, you may require legal advice on company law and on your commercial business.
We provide legal advice to directors and shareholders of their rights, powers, duties and liabilities under the Companies Act, articles of association, directors service agreements and the contractual terms of their shareholder agreements. We also advise individuals offered directorship of their legal duties and potential personal liabilities. If you need advice and court representation in bringing or defending shareholder claims against a company or its directors, you can contact us at James Chan & Co for legal advice and court representation in litigation.
Company Directors Disqualification Act 1986
On the 1 October 2009, the remaining provisions in the Companies Act 2006 came into force. The Company Directors Disqualification Act 1986 will be amended to take into account any breach by a director of his statutory duties under the Companies Act 2006 when determining disqualification of a director on the grounds that he or she is unfit to be a director. Under Section 6 of the Company Directors Disqualification Act 1986, the Court will consider admissible evidence of persistent breach of the Companies Act 2006 (carrying a maximum of 5 years' disqualification), breach of the directors' statutory duties and the conduct of a director which makes him unfit to be concerned with the management of a company.
During litigation, the Court is required to consider any misfeasance or breach of any fiduciary or other duty by a director in relation to the company. Consideration is given to evidence of a director acting within his authority and exercising care, skill and diligence in performing his or her duties and functions. It is not a defence in disqualification proceedings in court for an appointed director to plead that such duties were delegated to another person. Such a person assuming the director's duties could be made the subject of disqualification proceedings if he or she is considered to be a shadow director of the company with whose directions and instructions the directors of the company are accustomed to act.
Disqualification could also result from an investigation by the Department for Business, Innovation and Skills (formerly DBERR) which finds the director unfit to be concerned in the management of a company (maximum 15 years' disqualification). In cases where there has been fraudulent trading or wrongful trading, a disqualification of a period of 15 years may be ordered. Securing such disqualification orders is particularly effective to prevent directors who rely on the limited liability of the company to run up debts that remain unpaid, cease trading and then start up a new company to carry on the same business.
A disqualified director cannot be concerned with the management of a company directly or indirectly or act as promoter. Breach of a disqualification order is a criminal offence which could result in a fine and imprisonment and the disqualified director is personally liable for the debts of the company during the period when he acted, whilst disqualified.
Shareholder Derivative Claims and Directors' Liability
Under English law, the general rule is that only the company (itself a separate legal person recognised in law), and not the shareholders, can bring legal action against the parties responsible for wrongs done to the company, e.g. unauthorised withdrawal of capital from the company by a director. In practice, if the directors acted in breach of duty or in breach of trust, the majority of shareholders may vote to take legal action against the directors concerned. In the absence of a majority vote being passed, no action can be commenced against the directors.
There are exceptions to the general rule and these relate to fraudulent or illegal acts by directors, for example, where directors secure for themselves benefits from a profitable contract which should have gone to the company. Other exceptions relate to the denial of an individual's shareholder's rights, the implementation of corporate decisions without the required majority votes and where the majority of shareholders commit a fraud on the minority shareholders. The rule and exceptions severely restricts the shareholders' access to remedies via the court. This has however been redressed to some degree in the Companies Act 2006 which provides procedures for a shareholder to pursue legal action in the form of a derivative action. Subject to the provisions in the Companies Act 2006, for a shareholder to bring a legal claim in the name of the company against the parties responsible for wrongs done to the company.
Section 260(3) came into force on 1 October 2007 and provides that a derivative claim may be brought in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company and that such legal action may be brought against the director or another person (or both). Any provision in the company's constitution or in a contract with the company which seeks to exempt the directors or auditors from such liability is generally void except where permitted in law.
Authorised Share Capital and Allotment
There are major changes on company authorised share capital after 1 October 2009. There is no longer a need for the authorised share capital of a company to be stated in its memorandum and to have an authorised share capital. The ability of a company to allot shares are governed by rules and these fall under two separate situations. There are rules which apply to private companies having only one class of shares and rules for all other issues by private or public companies. Directors of private companies with only one class of shares will no longer require the authority from its members to allot shares unless this is specifically provided for in the company's articles of association (section 550 Companies Act 2006). In all other cases, the power of the directors to allot shares is subject to prior authorisation by the company shareholders via ordinary resolution or by the company's articles of association. In cases where there are no provisions in the articles of association restricting the power of the directors to allot in a private company, and in the absence of relevant provisions in a shareholders agreement, the minority shareholder could find his shareholding in the company diluted.
Alteration of Share Capital
Under the Companies Act 2006, a company may only alter its share capital by an increase of capital by the allotment of new shares; reduction of capital (see below); sub-division or consolidation of shares; reconversion of stock into shares and redomination of shares (e.g. GBP into Euros).
Reduction of Share Capital
This may be done by a company for a variety of reasons, including repayment of any paid up share capital which is in excess of the company's needs or the cancellation of any paid up shares which are no longer represented by available assets. A special resolution is required for a private limited company but in the case of a public company, an application for court approval is required. Directors of private companies are required to provide a statement that the company will remain solvent after the reduction in capital. This solvency statement is to support the shareholders resolution to the reduction. It must be made no longer than 15 days before the proposed resolution and should state that each of the directors is of the view that there are no grounds on which the company would be unable to pay its debts and that any winding up within the next 12 months would be a solvent liquidation. If a solvency statement is given recklessly without due consideration of the company assets and liabilities, the directors will be commiting a criminal offence. This could lead to imprisonment and/or a fine. The date the reduction takes effect is governed by the date of registration of the special resolution and the solvency statement confirmed by the board of directors that it was properly made and circulated to the shareholders. For companies which have a statement of share capital in their memorandum, an alteration must be filed with Companies House.
Companies must have in all company e-communications, the full name of the company; registration number; place of registration and its registered address. Commercial and e-commerce businesses should include these details in all business correspondence, invoices, emails (footers) and websites used in the course of their businesses including electronic trading platforms. Where the business is a money service provider, transmitter or payment institution registered with HMRC or authorised by the Financial Services Authority (FSA), the registration and authorisation number should also be displayed. Non-compliance could result in fines. For further details, refer to sections 82 and 84 Companies Act 2006 and The Companies (Trading Disclosures) Regulations 2008. For transparency related issues, see section on commercial law.
Company Dividends from Shares and Profit Extraction
Her Majesty's Revenue & Customs has provided guidance on the application of Part 7 (Employment Income: Share Related Income and Exemptions), Chapter 4 (Post-Acquisition Benefits from Shares) of the Income Tax (Earnings and Pensions) Act 2003, Section 447. This provision creates a tax charge on post-acquisition benefits derived from employment related securities including shares. For small owner managed companies which pay dividends out of company distributable profits to its director shareholders by way of profit extraction, HMRC will not apparently apply section 447 if there is no attempt at avoiding income tax or national insurance contributions on remuneration (or any attempt at avoiding IR35 rules). Dividends paid on shares of special purpose vehicles set up to pay employee bonuses, and contractors in place of income subject to PAYE and NIC to avoid the IR35 rules, may be subject to the tax charge under section 447. This may change and advice from your accountants and tax advisors are strongly recommended.
Company Automatic Late Filing Penalties May 2010
Company accounts must be prepared and filed in accordance with the Companies Act 2006. The time for filing accounts for private companies has been reduced to 9 months after the company Accounting Reference Date and 6 months for public companies. With effect from 1 February 2009, accounts for financial years beginning on or after 6 April 2008, the following new penalties will apply:
|Length of delay (from the date accounts are due)
|Not more than 1 month
|More than 1 month but not more than 3 months||£375
|More than 3 months but not more than 6 months
|More than 6 months
These amounts are automatically doubled where:
(1) The company accounts are filed late under the Companies Act 2006; and
(2) The previous year's accounts under the Companies Act 2006 (financial year beginning on or after 6 April 2008) were also late.
Company directors are encouraged to file their accounts and reports on time because they must provide this information for public record. It is in the interest of the company that its accountants and auditors are provided the necessary information for early preparation and filing of company accounts to meet deadlines imposed under the Companies Act 2006 to avoid the automatic late filing penalties which apply to all private companies whether trading or non-trading. See guidance.
Directors and shareholders can contact James Chan & Co for advice on company law, directors' rights, shareholders' rights and all aspects relating to management of their commercial businesses, corporate governance and compliance. If there have been changes in your corporate commercial business or you are about to seek corporate finance or introduce investors, we can help you review and consider the adequacy and suitability of your company articles of association, shareholders agreement and directors' service agreements.
Provisions of Services Regulations 2009 - Duties of Service Providers
The Provision of Services Regulations 2009 became law on 28 December 2009 and applies to all companies (including firms and advisers) involved in the activities of provision of services to businesses and consumers. The first main aim is to ensure customers of service providers have access to a minimum amount of information and to a complaints procedure to help them make an informed decision when considering the services of providers. Certain businesses are excluded from these regulations. These include providers in financial services, electronic communications, transport, temporary work agencies, healthcare, audio visual, gambling and social services. For a full list of excluded service providers, see Regulation 2(2).
If your company business falls within the scope of these regulations, you must provide your customers with the name of your business, your legal status; geographical address at which you are established, details by which you may be contacted (e,g, telephone, email), details where you are registered with, registration number, name of your trade or other similar public register where you can be identified, the authorisation scheme or regulated professional authority which you are subject to, VAT registration number, general terms and conditions of business which you use, existence of after sales guarantee (if any), price for your services (where pre-determined for a given type of service), main features of your services and name and contact details relating to your professional liability insurance (if required to be held). For a full list of the information required to be disclosed, refer to Regulation 8(1).
The required information may be supplied to customers on your own initiative and/or made easily accessible at the place where the service is provided and/or the contract concluded, made accessible to customers electronically such as a public website and/or included in any information documents that you supply your customers which set out a detailed description of your services such as your terms and conditions of business agreement. For a complete list of ways of supplying the required information, see Regulation 8(2).
Under these regulations, contact details must be provided to customers should they wish to make a complaint and you are obliged to respond quickly, although there is no definition of the time limit for a response since types of complaints vary and different considerations apply (e.g. language issues, information from third parties required and nature of the complaint). Although the aim is for you to do your best to resolve and find satisfactory solutions to complaints, you are however not expected to do so for vexatious or malicious or clearly unsubstantiated complaints. For the full provisions relating to complaints, see Regulations 10 to 12.
Authorisation & Licences
The second main aim of the Provision of Services Regulations 2009 is to comply with EU Services Directive on freedom of service providers businesses to provide services within the EEA. These regulations apply to permanent service providers' businesses which are established and based in premises in the UK and temporary service providers operating in the UK but based in premises in other EEA states, and vice versa. If a service provider, established in another EEA State, wishes to provide services in the UK, it must register and apply for a licence with the UK competent authority. Similarly, a UK established service provider must also register and apply for a licence to the competent authority in another EEA State it wishes to provide services. EEA Member States are required to have Points of Single Contact (PCS) that allow services providers to apply and pay for authorisation online. Requirements may be imposed by competent authorities but these must not be discriminatory and certain requirements are prohibited. If an EEA State is imposing illegal requirements to your provision of services, you may bring this to the government's attention. In the UK, you may contact the UK SOLVIT centre at email@example.com and the matter taken up with the European Commission. A complete list of prohibited requirements is set out in Regulation 21.
Payment Services Regulations 2009
The Payments Services Directive 2007/64/EC was implemented by the Payment Services Regulations 2009 which came into force on 1 November 2009 ('PSR 2009'). These regulations seek to harmonise standards and the rights and obligations of payment service providers or money transmitters and users of payment services in the EU and to provide market transparency and competition. The aim of the Directive is to guarantee fair and open access to payments markets, increase consumer protection and ensure electronic payments within the EU, such as money transfers, become as easy and efficient and secure as domestic payments within a single Member State. Payment service providers include credit institutions, electronic money institutions and payment institutions or money service businesses. For a list of the regulated activities, see Part 1 of Schedule 1 of the PSR.
Payment institutions require registration for authorisation by the Financial Conduct Authority. Initial capital requirements apply depending on the activities undertaken. In addition, PIs must also comply with ongoing capital or 'own funds' requirements which may be calculated by one of three methods determined by the FCA. The users or consumers of PIs are afforded protection by segregation of customers funds received by the PIs or by the putting in place of an insurance policy or other comparable guarantee. These financial limits and requirements are subject to change.
All payment institutions are subject to the Financial Conduct Authority (FCA) Handbook on Conduct of Business requirements including the requirement of having customer complaints handling procedures. Payment Institutions must also have in place updated anti money laundering and counter-terrorist financing procedures and policies to be applied to clients before establishing a business relationship and client transactions during business to comply with statutory and regulatory obligations. Such procedures include indpendent verification of client identity and residence by client due diligence and, in circumstances, enhanced due diligence.
Payment institutions may conduct regulated activities and services in another EEA State with the FCA as the Home State regulator. Such "passporting" right may be in the form of establishing a branch in another EEA State or a Host State to provide payment services or by cross border services without the establishment in the Host State. As of June 2010, Greece, Sweden and Poland have yet to implement the provisions of the Payments Service Directive with Romania, Spain and Cyprus yet to have in place secondary legislation required to fully implement the Directive. The EU Commission has on 3 June 2010 acted to ensure implementation. The FCA provides guidance on the scope of the Payment Service Regulations 2009.
In addition to authorisation and regulation by the FCA, payment institutions must also be registered with HMRC which regulate their money remittance actvities and foreign exchange transactions, in particular, compliance with anti-money laundering laws and procedures. As part of the HMRC remit, it carries out inspections of payment institutions to audit transactions, client due diligence, monitoring, record keeping and client transactions. All payment institutions are bound to report suspicious client transactions during the course of business relationship. Such suspicious activity reports or SARs are made online directly to the National Crime Agency for approval before execution of the client's instructions on remittance of funds.
China - 'Template' Commercial Contracts
For commercial agreements with Chinese companies in China for the manufacture, supply and sale of goods, agency agreement, consultancy, distribution and licensing, it is advisable for businesses to avoid the use of standard contract form of wording from similar but unrelated commercial transactions or templates. Although some of these agreements have "standard" templated terms and conditions, there may be provisions that may not be relevant to your commercial business transactions. The agreement should be written in Mandarin and English. Care taken to ensure it is translated accurately to reflect terms agreed.
Chinese Law & Jurisdiction of Courts in China
There are several choices for resolving disputes between contracting parties in a commercial agreement. Generally, disputes with Chinese businesses are resolved and settled amicably through meetings and by discussions to preserve commercial business relations. Forms of dispute resolution include mediation, arbitration and civil court litigation. Joint venture agreements are subject to Chinese law and issues of corporate insolvency or employment are subject to the jurisdiction of the Chinese courts. Care should be taken when choosing governing law and jurisdiction for agreements. Foreign judgments may not be recognised or enforceable in China.
Commercial business opportunities could present unexpected legal and commercial challenges. When in doubt, contact us to discuss your commercial requirements, whether to produce standard terms of trade, sale and purchase contracts, review tender documents, preferred supplier agreements, commercial trade letters of credit or for legal advice on the terms in commercial contracts for goods and services, before making an informed decision or signing on the dotted line.
Advice on Commercial Contracts
We review, advise and prepare contracts for commercial transactions and assist with advice on the terms of agency agreements, distribution agreements, joint ventures and non-disclosure agreements. You can contact James Chan & Co for legal advice and commercial legal representation.
Civil Procedure Rules
Civil Procedure Rules (CPR) are the rules and procedures which govern the conduct of commercial litigation in England. The rules are divided into Parts and each Part is supplemented and modified by Practice Directions from the courts from time to time to assist with clarification of the rules and procedures. Claimants, Defendants, Solicitors, Barristers and the Court are bound to follow the CPR in the conduct of commercial court cases.
Reforms to Civil Procedure Rules
New court procedures rules, claim financial limits and costs reforms will come into force on 1 April 2013. The concept of costs budgets which parties to the action are to agreed and costs management conferences presided over by the Court have been introduced and will now apply to the majority of cases with the exception of particular Courts and high value claim cases. The small claims limit for non-personal injury claims has arisen to £10,000. As the successful party in a small claims action is not entitled to costs, the result of changes may be an increase in litigants in persons and small claims cases for Judges in the lower courts who will have to deal with litigants 'having a go" and wanting their day in court without professional legal representation. Claimants, with good and weak cases alike, may be more ready to bring proceedings as litigants in persons since they will no longer be at risk of paying the legal costs of successful Defendants. Similarly, Defendants with weaker cases may be inclined to defend small claims in the absence of risk of liability for costs of the successful Claimant.
Disclosure & Inspection
Parties to litigation are obliged to disclose relevant documentary evidence to each other; even if such evidence is prejudicial to their claim or defence. Disclosure may be standard or otherwise as order by the Court. CPR Part 31.4 defines a document as anything in which information of any description is recorded.
Parties to litigation are required to preserve relevant evidence after commencement of litigation and to make a reasonable search of electronic storage systems for active, archived and deleted data. Deleted relevant documents can and should be retrieved, reconstituted and adduced as evidence in commercial court litigation. E-disclosure should always be considered at an early stage of litigation, preferably pre commencement of legal proceedings. It would be helpful if clients and litigants have internal procedures in place for locating and retrieving electronic documents should these be required in litigation.
Electronic Disclosure of Documents in Litigation
Part 31 Practice Direction 31B relates to disclosure of electronic documents, including e-mail and other electronic communications, word processed documents and databases. In addition to documents that are readily accessible from computer systems and other electronic devices and media, the definition covers documents that are stored on servers and back-up systems and electronic documents that have been ‘deleted’. It also extends to additional information stored and associated with electronic documents known as email and file metadata (information on document creation date, edit date, view dates, distribution list, amended text etc. automatically added to electronic documents but normally not displayed on paper copies or screen).
In Earles v Barclays Bank Plc (2009), the court had to decide whether to believe the evidence of the claimant customer or the defendant bank. The issue was whether the bank was in fact authorised and instructed by the claimant customer to process transfer transactions on each of five occasions. The bank's terms of business provided, inter alia, that it can act on instructions (including instructions to make or collect payments from or into an account) given on a document bearing the customer's signature; or by telephone or computer, as long as security procedures were followed and whether or not the instructions were given by the customer or not; or verbally, as long as the bank was able to identify the customer. The court had to consider whether telephone calls or emails were made on each of these five occasions and, if so, what had been said or written that evidences the customer's instructions. The court was critical of the bank's failure to provide electronic disclosure of key commercial documents that were absolutely essential to a court if it were to achieve accurate and efficient fact finding in civil litigation. This included emails which contents were relevant contemporaneous evidence that went to factual issues to be decided in a case. The learned Queen's Bench Division Judge stated 'The Practice Direction is in the Civil Procedure Rules (CPR Part 31 Practice Direction 2A) and those practising in civil courts are expected to know the rules and practice them; it is gross incompetence not to.' Although the claimant was unsuccessful and his claim dismissed, the court decided in its discretion that a fair and proportionate award for costs was for the claimant to pay only 25% of the claimant's claimed costs; given the failure to provide proper electronic disclosure.
Inadequate Electronic Disclosure - Wasted Costs in Litigation
The High Court Queen’s Bench Division has on 27 February 2012 handed down its decision on the defendant’s application for wasted costs orders against the claimant. Ramsay J considered categories of alleged deficiencies in electronic disclosure by a claimant in the defendant’s application. These are the failure by the claimant properly to review the documents which were provided for disclosure; failure of its disclosure team properly assemble the relevant documents; failure properly to de-duplicate documents; failure to deal with redactions in a satisfactory manner; failure to gather together and deal with disclosure of custodians; failure to provide searchable optical character recognition copies and failure to provide appropriate searchable fields within the database. The learned Judge further considered the claimant failed properly to de-duplicate documents which inevitably lead to wasted time and costs in reviewing a number of copies of the same document, failed to gather together a consistent and complete set of electronic data for electronic disclosure resulted from an inadequate initial review and gathering together of a complete set of electronic documentation and finally, failed to properly review documents located in the searches of the electronic database that should have been disclosed earlier which resulted in significant difficulties arising and the need for re-review. These failures inevitably increased costs when the disclosure process becomes disrupted and resulted in the review of documents over a prolonged disclosure period and led to additional reviews and searches of disclosed documents, missing documents and the return on a number of occasions for further applications to the court to deal with the disclosure of further documents. In addition to paying the costs for part of the defendant’s application, the Court ordered the claimant to pay 80% of the defendant’s costs of dealing with the duplicate copies of previously identified documents, 80% of the defendant’s costs of dealing with redacted documents disclosed by the claimant, 50% of the defendant’s costs of dealing with and reviewing in excess of 47,197 documents. The claimant was ordered make a payment of £135,000 on account of wasted costs.
We provide advice, solutions and representation on behalf of Claimants and Defendants before and after the start of legal proceedings and can assist with the forensic evidence aspect of commercial litigation process.
Forcing Settlement of Commercial Claims
It is always time and cost effective to avoid litigation by settling a claim for which you are liable. If the claim is excessive, you make an offer to settle an amount for which you believe you are liable. What do you do if court proceedings are issued for a claim you know to be excessive or if the claimant attempts intimidation by retaining a large firm of solicitors to act on their behalf or you find the conduct of the case is deliberately dragged out to wear you down and/or exhaust your resources? Will you be able to force settlement and bring the case to an end to minimise legal costs on both sides?
Prior to 6 April 2007, Defendants wishing to make an offer to settle a claim under Civil Procedure Rules Part 36 at any time before or after court proceedings are commenced. The offer must be in writing; state it includes interest and is intended to have the costs sanction consequences of a Part 36 offer to settle; specify a period of not less than 21 days within which the Defendant will be liable for the Claimant's costs (to be assessed by the Costs Judge if not agreed) if the offer is accepted; state whether the offer refers to the whole of the claim in the statement of claim or to a part of it; whether it takes into account any counterclaim by the Defendant and funds to back the offer (a form of security for the Claimant) made must be lodged in court. If the Claimant accepts the offer, the claim is brought to an end. If the Claimant refuses to accept the offer and proceeds with litigation and is awarded an amount of the claim which is less than the sum offered by the Defendant, the Claimant will be subject to the costs consequences and must pay the Defendant's legal costs with interest from the date the offer expired. However, some Defendants encountered difficulties in complying with the requirement to make actual payment of funds into court to support their offer to settle, in circumstances where such payment may not necessarily bring an end to litigation. They were therefore deprived of a useful tool that could force early settlement.
Following changes to Part 36 of the Civil Procedure Rules, the Defendant is no longer required to lodge funds into court to back the offer. This brought some balance back into commercial litigation. If the Part 36 offer is accepted by the Claimant, the Defendant has 14 days to make payment to avoid a judgment from being entered. By making a Part 36 offer of settlement, a Defendant would have gained leverage and transferred part of the risks from commercial litigation back to a Claimant, particularly one with deep financial pockets. Other changes allow Claimants to accept Part 36 offers to settle out of time without consent of the court subject to the costs consequences but there may be exceptions to this general rule as costs is always at the discretion of the court in commercial litigation.
Part 36 offers to settle a claim by either the Claimant or Defendant are not subject to the law of contract. Although a relevant period of at least 21 days for acceptance is required to be given to the party receiving the offer, such offers are open to acceptance at any time without the need for permission of the Court up until the time when trial begins.
Legal Advice and Representation
If you have a claim or if you have been served with legal proceedings, you can contact us for legal advice on your case, claim, defence or counterclaim and for legal representation in the commercial courts or tribunals. Most claims are subject to time limits and it would be prudent to seek legal advice at an early stage. It could result in early resolution of a dispute or possible settlement without commencement of legal proceedings or bring existing legal proceedings to an early end.
Expert Witnesses - Abolition of Immunity in Litigation
Expert witnesseses have enjoyed protection from being sued when giving evidence in legal proceedings. This immunity was abolished in a recent decision of the Supreme Court on a point of public importance concerning litigation. In Jones v Kaney , Lord Phillips gave the leading judgment which held that expert witnesses owed a clear contractual duty to exercise reasonable skill and care. The broad consequence of denying immunity accorded to expert witnesses will be a sharpened their awareness of the risks of pitching their views of the merits of their client's case too high or too inflexibly lest these views come to expose and embarass them at a later stage. His Lordship welcomed this change as a healthy development in the approach of expert witnesses to their ultimate task and sole rationale of assisting the court to a fair outcome of the dispute or, indeed, assisting the parties to a reasonable pre-trial settlement. The decision leaves open claims against experts for breach of contract and/or negligence in relation to evidence they give in legal proceedings.
Litigation in China -People's Court of China
One main provision which must be present is the Jurisdiction and Governing Law Clause. For certainty, it is desirable to agree that the contract is to be interpreted in accordance with and governed by a particular country's law (e.g. English Law or Chinese Law) and disputes are heard in a court within a particular jurisdiction exclusively, or perhaps non-exclusively, depending on the nature of the commercial agreement or transaction and enforcement considerations. Care should be taken before submitting to a particular court of law and jurisdiction. Legal advice should be taken beforehand. Another useful provision would be the Language clause which sets out the version of the commercial agreement which is to prevail for interpretation or dispute purposes. There are however local laws, civil court and litigation procedures which must be considered. The People's Court of China requires cases to be presented in Mandarin and if a document is in a language other than Mandarin, a Chinese translation must be appended before it is submitted as evidence in litigation.
Arbitration in People's Republic of China - CIETAC
If a commercial agreement provides for disputes between contracting parties to be referred to CIETAC (China International Economic and Trade Arbitration Commission) arbitration, the specific place of arbitration in China (e.g. Beijing; Shanghai) and the applicable governing law should be clearly stated to avoid ambiguity. The agreement could, for example, provide for referral of disputes to CIETAC arbitration with English law or Chinese law to apply. Attention before conclusion of a binding contract could save a lot of time and costs later in the event a dispute arises and enforcement of an award becomes necessary.
New CIETAC Arbitration Rules came into effect on 1 January 2015. A copy can be accessed here.. The CIETAC website has contact details and English translated text versions of the Chinese procedure for an application for arbitration of disputes, a list of arbitrators and Model Arbitration Clauses for CIETAC arbitration of disputes in China. The website sets out the advantages of arbitration, the rules and procedures of the tribunal, application process, evidence requirements and fee schedule and an online Chinese Ren Min Bi (RMB or Yuan) fee calculator for domestic, foreign related and finance disputes. If there is a specified dispute, you need to convert the sum in dispute into RMB.
Chinese Arbitration - Other Economic and Trade Disputes
Financial services disputes arising from transactions between financial institutions, or arising between financial institutions and other natural or legal persons in the currency, capital, foreign exchange, gold and insurance markets that relate to financing in domestic and foreign currencies, and the assignment and sale of financial instruments including securities and futures, loans, fund transactions, bonds, guarantees and letters of credit can be referred to CIETAC in accordance with the Financial Disputes Arbitration Rules which came into effect on 1 January 2015. CEITAC also offers online arbitration with electronic mail filing of particulars of the case and evidence. A set of its Online Arbitration Rules are set out in its website.
London Arbitration, Commercial Court Litigation
James Chan & Co has acted for Buyers and Sellers in commercial sale and purchase of goods contracts, including disputes arising from damage to containerised and bulk goods, jurisdictional disputes, obtaining and enforcing security for claims and costs and enforcement of judgments and awards. Contact us for advice and representation in arbitrations and commercial court work.
For an insight into commercial trading with the People's Republic of China, see Exporting to China which is an extract from an article previously published in the UK Trade & Investment Guide.
Security for Cargo Claim
The letter of undertaking is a form of security for the claims of the cargo owners and interests given by a P&I Club (shipowners mutual protection and indemnity insurers) in return for cargo owners and interests agreeing to refrain from taking action that would prejudice the legal and commercial interests of shipowners such as the arrest of the ships of owners for security for the claims pending settlement or in other cases, the release from arrest of owner's ship and/or refraining from re-arresting owner's ships. Its wording is subject to contention and should be reviewed with developments in case law. Letters of undertaking can be made subject to English law and worded to accept the exclusive jurisdiction of the English High Court.
In Owners of the Cargo lately laden onboard the vessel 'Jutha Rajprueck' –v- Steamship Mutual Underwriting Association (Bermuda) (2003), the Admiralty Court and the Court of Appeal considered the meaning of a competent court in the context of an undertaking given by the P&I Club in the absence of an expressed agreement to English law and jurisdiction of the English High Court. The 'Jutha Rajprueck' carried a mixed cargo of steel coils, light and heavy machinery from Japan/Korea bound for Vietnam, Thailand and Malaysia. On the way to Thailand, she suffered an engine breakdown in bad weather, could not be restarted and was abandoned but later salvaged to a Chinese port. Part of the cargo sustained damage caused by shifting and water ingress. There were 28 'bills of lading' which were governed by different jurisdictions and provided for various laws to apply including English law, Thai law and exclusive Thai jurisdiction and exclusive Hong Kong jurisdiction. Cargo interests obtained security from shipowners’ P&I Club which included in its letter of undertaking:
'We further undertake that we will within 14 days of receipt of a written request from you to do so, instruct solicitors to accept on behalf of the above-named ship service of in rem proceedings brought by you in a competent court and/or tribunal as mentioned above and file an acknowledgement of service thereof, albeit wholly without prejudice to the Owner’s rights to contest jurisdiction and/or apply to stay such proceedings.'
The undertaking was to be governed by and construed in accordance with English law and the Club agreed to submit to the exclusive jurisdiction of the English High Court for the purpose of any process for the enforcement of the letter of undertaking.
Cargo interests subsequently issued an English court Admiralty claim in rem against the shipowner and/or demised charterers and sister ships. The Club was called upon to appoint UK solicitors to accept service of proceedings in accordance with the letter of undertaking but declined. It argued it was only obliged to instruct solicitors to accept service of proceedings brought in a competent court where such proceedings could be both commenced and pursued to a conclusion and contended the English Admiralty Court was not a competent court since it was not in a position to exercise its jurisdiction in rem because neither the 'Jutha Rajprueck' or her sister ships had ever come into English territorial waters. Further, the bills of lading were subject to exclusive jurisdiction elsewhere. The Admiralty Judge ordered the Club to appoint solicitors to accept service of proceedings in rem and to file an acknowledgement of service. The Club appealed against the decision.
The Court of Appeal rejected the Club’s contention as it made no commercial sense. It held that one of the purpose of a letter of undertaking is to give an undertaking to accept service of in rem proceedings in a competent court and this would be largely defeated if the Club was only obliged to accept service in a jurisdiction in which the vessel or a sister ship was actually present. The express reservation of the rights of the shipowner to contest jurisdiction and to apply to stay proceedings indicated that the competent court was not necessarily one in which the proceedings would be pursued to a conclusion. A competent court meant a court that has jurisdiction to entertain claims in rem proceedings and the Admiralty Court had such jurisdiction under sections 20 and 21 of the Supreme Court Act 1981. In the Court’s view, the decision by the Judge accorded well with the requirements of business efficacy and dismissed the appeal.
Pirates' Seizure & NYPE Time Charterparties
Does detention by pirates, piracy or the effects of piracy entitle charterers to put the vessel off-hire under a NYPE time charterparty? Its seems not, according to the Commercial Court decision on 11 June 2010 on an appeal from an arbitrator's tribunal decision on this preliminary point. Hire remains payable continuously unless charterers can bring themselves within any exceptions under a time charterparty. Any doubt as to the meaning of the applicable exceptions is to be resolved in favour of owners. In the case of Cosco Bulk Carrier Co. Ltd v Team-Up Owning Co Ltd in the case of M/V 'Saldanha', Mr. Justice Gross considered clause 15 of a NYPE charterparty dated 25 June 2008 which provided:
'That in the event of the loss of time from default and/or deficiency of men including strike of Officers and/or crew or deficiency of… stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, dry-docking for the purpose of examination or painting bottom, or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost...'
The arbitration tribunal decided the preliminary issue in the negative. it also concluded the war risk and insurance provisions of the charterparty did not preclude the Respondent shipowners from claiming hire in respect of periods when the vessel was under the control of pirates. Charterers appealed.
The vessel, a Panamax size bulk carrier, was delivered on or about 5 July 2008 for a charter period of 47 to 50 months at US$52,500 per day. On 30 January 2009, charterers gave orders to load a cargo of bulk coal in Indonesia for carriage to Koper in Slovenia. The voyage was to be via the Suez Canal and owners reserved their right to refuse to comply with these orders unless charterers confirmed they would reimburse owners for the additional war risk premium. Charterers confirmed they would do so 'as per Charter'. The vessel was seized by Somali pirates on 22 February whilst sailing the transit corridor in the Gulf of Aden. The vessel was directed to Eyl in Somali and remained there until 25 April before released. On 2 May, she reached an equivalent position to the location where she was seized. Charterers refused to pay hire for the period between 22 February and 2 May. Owners claimed for hire, bunkers, additional war risk premium and crew war risk bonuses under the terms of the charterparty, alternatively, by way of indemnity for following charterers' order. Charterers counterclaimed for unseaworthiness on the basis the vessel and crew had not been properly prepared to deal with an attack by pirates.
In coming to its decision, the Commercial court considered whether charterers were entitled to rely on three phrases in the wording of clause 15 in support of their counterclaim that the vessel was off hire as a result of her seizure by pirates. Charterers asserted (a) detention by pirates amounts to 'detention by average accidents to ship or cargo'; (b) 'default and/or deficiency of men' encompasses errors, alternatively negligent errors, by the master and crew; and (c) seizure by pirates falls within the sweeping up provision 'any other cause'. The Commercial Court concluded each of these issues in turn but concluded the seizure of the vessel by pirates was not covered by clause 15. The learned Judge referred to a bespoke clause in the charterparty which dealt with seizures but went on to conclude the wording therein could not also be construed as covering seizure by pirates. Clause 40 provided:
'Should the Vessel be seized, arrested, requisitioned or detained during the currency of this Charter Party by any authority or at the suit of any person having or purporting to have a claim against or any interest in the Vessel, the Charterers' liability to pay hire shall cease immediately from the time of her seizure, arrest, requisition or detention and all time so lost shall be treated as off-hire until the time of her release….'
The Commercial Court was not prepared to distort the meaning of clause 15 of the charterparty. Unless within the ambit of the exceptions, the risk of delay is borne by charterers. Charterer's appeal was dismissed. It is open to Charterers to seek permission to appeal to the Court of Appeal.
Financial Services Act 2012
The Financial Services Act 2012 came into force on 1 April 2013. The 2013 Act amends the Financial Services and Markets Act 2000. The provisions of the Financial Services Act 2012 can be viewed here.
The Financial Services Act 2012 requires the FCA to publish its policy statement setting out the matters it will take into account in deciding whether an investigation into possible regulatory failure is required and if so, report its findings and recommendations to HM Treasury for publication. On the 18 April 2013, the FCS published its 37 page policy on how it would meet its statutory obligations. Examples on how the two part stautory test and threshold range would interact and work in practice can be found in section 6 of its policy.
Financial Services Regulation
On 1 April 2013, the Financial Services Authority was abolished and replaced by the Financial Policy Committee FPC, the Financial Conduct Authority FCA and the Prudential Regulation Authority PRA. The FCA and PRA handbooks will come into force on 1 April 2013 replacing the FSA handbook. Financial services firms and compliance officers are expected to be familiarise themselves with the layout and contents. In brief, the FPC will have oversight for financial regulation. The FCA will regulate financial services firms, protect consumers through enforcement. The PRA is concerned with capital and liquidity requirements for banks and insurers. The approach towards regulation is expected to be outcome focus based. HM Treasury has a UK Regulatory System. The FPC and PRA operate out of the Bank of England at Threadneedle Street, London EC2R 8AH while the FCA is at 25 The North Colonade, Canary Wharf, London E14 5HS.
Payment Systems Regulator
From 1 April 2014, consumer credit will be transferred from the Office of Fair Trading to the FCA. This will include the changes brought about by the establishment of the new independent Payment Systems Regulator Payment Systems Regulator ("PSR") within the FCA to promote competition and innovation, ensure responsiveness to consumer needs and promote world class payment systems in the UK. The PSR is an independent subsidiary of the FCA with its own board of directors. The PSR does not regulate payment institutions authorised under the Payment Services Regulations which are primarily concerned with foreign exchange currencies. The PSR's objectives are to ensure that the payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them, promote effective competition between operators, PSPs and infrastructure providers and to promote development and innovation in payment systems.
Regulation of UK Competition
From April 2015, the FCA will become a concurrent regulator able to enforce competition law in financial services (including payment services) concurrently with the Competition and Markets Authority CMA. The FCA promotes healthy competition between financial service providers.
Financial Conduct Authority Business Plan 2015-2016
On 24 March 2015, the FCA published its Business Plan & Risk Outlook for 2015 to 2016. It seeks to achieve the overall objective of ensuring that markets work by protecting the consumer, promoting competition and enhancing the intergrity of the markets. During 2014, the regulatory remit of the FCA was extended to include consumer credit, mainly the regulation of firms that offered credit facilities to some of the most vulnerable in society. In its third year of regulation, the FCA sets out a strategy to address the changing scope of its regulation, improving its approaches and processes. It has seven areas of focus on risks from firms' systems and controls in preventing financial crime, poor culture and controls continue threatening market integrity, including conflicts of interes, technology outstriping firms' investment, consumer capabilities and regulatory response, issues arising from unfair contract terms, poor culture and practice in consumer credit affordability assessments, factors which may lead firms to act against their existing customers' best interests and pension and income products that deliver poor consumer outcomes.
EU Regulation of the Derivative Market
The House of Lords European Union Committee on Economic and Financial Affairs and International Trade Sub-Committee is conducting an inquiry into the regulation of the derivatives market. The FSA and HM Treasury have produced a joint paper in December 2009 on Reforming OTC Derivative Markets - A UK Perspective that they referred to in responding to the House of Lords European Commission's Communications on Ensuring Efficient, Safe and Sound Derivative Markets at Memorandum from the FSA and HM Treasury. This memorandum was referred to in the evidence submitted by the Futures and Options Association. A copy of its response to the House of Lords can be viewed at FOA evidence to House of Lords.
European Supervisory Authorities and a European Systemic Risk Board in 2011
Supervision and regulation of financial institutions are about to be tightened following agreement between the European Parliament and the Council of Ministers on 2 September 2010 to create three new European Supervisory Authorities and an European Systemic Risk Board (ESRB). The existing Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Committee and the Committee of European Securities Regulators are to be replaced. The ESRB will help with restoring confidence, the development of a single EU Rulebook and solving problems with cross-border firms. Oversight of regulated firms will remain with national supervisors like the Financial Services Authority. Although the new structure is said to provide for better coordination of financial services supervisors across Europe, it remains to be seen whether Britain's sovereignty over her financial regulation will be further weakened. Multi-layered legislation is being considered. See EU final proposal for macro prudential oversight of the financial systems and establishment of the ESRB.
MiFID - Financial Advisers and Cross Border Services
Financial advisers in the UK are not automatically subject to the Markets in Financial Instruments Directive (MiFID). This EC Directive provides that investment advice must be regulated in all EEA Member States and it applies to financial advisers who are not exempted. If a UK financial adviser were to give personal investment advice to a customer who lives in or subsequently moves to another EEA Member State, it must ensure it complies with the legal requirements of that EEA State. There is, however, an alternative to setting up a branch office in other Member States. The financial adviser can obtain a "passport" for services it wishes to render in the other EEA Member State. By doing so, the financial adviser opts in to MiFID.
EEA States with passporting rights (May 2008) include Austria, Belgium, Bulgaria, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.
There are the Insurance Mediation Directive (IMD) passports for insurance products and/or the MiFID passports for investment based products. Different passports are required for advice on different products. We suggest careful consideration be first given to compliance issues and a cost benefit analysis carried out before decision. Generally, the financial adviser opting in to MiFID is expected to meet the current financial resources requirement, provide detailed systems of controls, comply with FCA Handbook requirements, not hold client monies or assets and in addition meet the minimum initial capital of Euro 50,000 or Professional Indemnity Insurance (PII) of Euro 1 million for any one claim aggregated at Euro 1.5 million. There are options that involve lower initial capital levels of Euro 10,000 or Euro 25,000 and lower PII claim and aggregate limits. These figures and requirements are subject to change and a draft IMD II EC Directive has been published.
Insurance Intermediaries Regulation
The Financial Conduct Authority authorise and supervise intermediaries in the insurance industry. Intermediaries are required to be aware of conflicts of interest, disclose required information, categorise clients and comply with the FCA Insurance Conduct of Business Handbook which can be found here. The conduct of business requirements applying to firms with general insurance commercial business came into force on 6 January 2008. Firms which carry on insurance mediation activity other than an insurer have an obligation to disclose commission to clients when asked. The purpose is to promote transparency for clients and the financial services market. The disclosure should be made in a manner which is clear, fair and not misleading. These principles are derived from the EC Council Directive on Insurance Mediation 2002/92/EC.
Broker's Status Disclosure
In line with the transparency requirements, compliance with status disclosure is required for customers.
ICOBS 4.1.2 provide for insurance intermediaries' "Status Disclosure"before the conclusion of a non-investment insurance contract, on amendment or at renewal. An authorised firm must provide to its customers its name and address, details of its inclusion in the Financial Services Register and the means to verify this, whether it is a direct or indirect holding representing more than 10% of the voting rights or capital in a given insurance undertaking (that is not a pure reinsurer), whether a given insurance undertaking or its parent has a direct or indirect holding representing more than 10% of the voting rights or capital in the authorised firm. Such a firm is required to have in place a complaints procedure to allow customers and other interested parties to register complaints and provide for settlement of disputes and redress.
General exemptions from the status disclosure are available to strict Introducers. Under ICOBS 4.1.4, introducers whose contact with a customer is limited to effecting introductions are exempted from the full requirements of Status Disclosure. However, if they go further by advising the customer on a particular policy or become involved in entering into commercial arrangements with a view to policy transactions or contracts of insurance in expectation of a commission or percentage of a commission, the introducers may find themselves bound by the full requirements in ICOBS 4.1.4.
Duty to Disclose Fees, Commissions and Arrangements
As regards fee disclosure by a broker to its customer or policyholder, the general requirements are in addition to the separate price disclosure of the premium.
In addition to the law on fiduciary obligations, a broker that conducts insurance mediation activities for a commercial customer must, if that commercial customer asks, promptly disclose the commission that he and any associate of his receives in connection with the non-investment insurance contract in question, in cash terms or, to the extent it cannot be indicated in cash terms, the basis for the calculation of the commission in a durable medium. All forms of remuneration from any arrangements including arrangements for sharing profits, for payments relating to the volume of sales, and for payments from premium finance companies in connection with arranging finance, are to be included. This should allow commercial customers to make informed decisions about competing prices.
Where intermediaries such as marine insurance brokers who are remunerated by way of a commission paid by the insurer, ICOBS 4.4.3 applies. ICOBS 4.4.3 does not replace the general law on fiduciary obligations of an agent and disputes will be subject to commercial law and litigation. In relation to commercial contracts of insurance the root of these obligations is generally a duty on the agent to account to his principal. However, in certain circumstances, the duty is one only of disclosure. Where a commercial customer employs an insurance intermediary by way of business and does not remunerate him, and where it is usual for the insurance intermediary to be remunerated by way of commission paid by the insurer out of premium payable by the commercial customer, then if the customer asks what the insurance intermediary's remuneration is, the insurance intermediary must tell him.
ICOBS 4.4 require intermediaries to disclose to their commercial customers all commission paid to affiliated companies and agents including any profit sharing arrangements. Procedures should be put in place by company directors and owners of authorised firms to respond to requests for information from commercial clients and for the maintenance of proper records evidencing compliance. Authorised firms are expected also to demonstrate that they have treated their customers fairly.
If an authorised firm use agents the relationship should be governed and evidenced in the form of a written contract or agreement for practical commercial reasons (e.g. commission payments, terminations) and for management of liability risks (e.g. restricting activities outside scope of authorisation, avoiding inadvertent holding out and misrepresentation). Such a written agreement provides protection for both parties in a dispute or in a claim originating from a third party customer.
Broker's Fair Analysis of the Market
ICOBS 4.1.6 - This requirement provides that an authorised firm must inform its customers, prior to the conclusion of a commercial contract, whether it gives advice on the basis of fair analysis of the market or it is tied exclusively to one or more insurance undertakings or that the authorised firm neither gives fair analysis or is so tied. The use of regularly reviewed information on products, premium and services offered to customers by several insurance undertakings or a panel of them may satisfy the requirement on provision of a fair analysis of the market.
Compliance & Regulation
Directors of authorised firms should seek guidance from the FCA and assistance with putting in place the necessary procedures to comply with conduct of business.
National Crime Agency (NCA)
The National Crime Agency (NCA) started operations on 7 October 2013. It replaced the Serious and Orgainsed Crime Agency. Financial Conduct Authority authorised firms and other commercial professional businesses subject to Anti Money Laundering regulations will continue to make their suspicious activity reports (SARs) on money laundering and terrorist financing to the NCA UK Financial Intelligence Unit (UKFIU).
AML Compliance - Submitting SAR for Consent
From 1 October 2014, in an attempt to address one of the causes of delays in the turnaround of consent requests (and probably defensive reports), a SAR requesting consent which are missing the reason for suspicion or fail to identify the nature of the criminal property will be closed without further engagement of the UKFIU. The reporting party will be sent a letter explaining which parts of the information are missing and with notice of closure. The impact of this change could result in the regulated sector having to ensure its SARs comply with the reporting requirements.
Fourth Anti-Money Laundering EC Directive 2013
The European Commission has published its draft Anti-Money Laundering Directive aimed at prevention of money laundering and terrorism finance. A main change from existing AML law is the requirement to identify beneficial owners of companies as part of improved KYC or customer due diligence to improve transparency of clients and their businesses. Changes have also been proposed on dealing with PEPs and record keeping requirements and the requirement for customers subject to the AML regime to hold accurate and up to date information on their beneficial owners. The proposed changes will impact on financial services firms, payment institutions as well as the professionals sector in customer due diligence compliance procedures.
The House of Lords EU Committee 19th Report on Money Laundering and Financing of Terrorism was printed in July 2009. The report sets out and describes the problems posed by money laundering and terrorist financing and looks at possible co-operation internationally and at the EU level. It also sets out and explains customer due diligence as a measure the regulated sectors are required to take when establishing a business relationship and when carrying out large occasional transactions as one transaction or part of a series of transactions.
New Insurance Mediation Directive - IMD II
The European Commission published a draft second Insurance Mediation Directive on 3 July 2012 which is referred to as IMD II and which is set to replace the Insurance Mediation Directive 2002/92/EC or IMD. When implemented, it will impact and change the FCA Handbook on ICOBS. Main changes are aimed at providing sufficient information to customers, transparency and avoiding conflicts of interest. It is proposed that insurance mediation exclude 'introducing' but include 'advising' on the conclusion of insurance contracts.
The Bribery Act 2010
The Bribery Act 2010 came into force on 1 July 2011. Its application extends to all persons and companies doing business in the UK and covers actions taken overseas which are offences under the Act if the person performing them is a British national, is ordinarily resident in the UK or a body corporate in the UK. The new offences created are the bribing of another person under Section 1; being bribed (where a person requests, agrees to receive or accepts a financial or other advantage) under Section 2; bribing a foreign official under Section 6 and failure by a commercial organisation to prevent bribery under Section 7. There is a defence in circumstances where a commercial organisation can demonstrate it has adequate procedures in place as part of its compliance and governance regime. What amounts in law to adequate procedures will be subject to interpretation by the English courts.
New and detailed 2011 Guidance
published by the UK government under Section 9 sets out preventive procedures commercial businesses can put in place to prevent persons performing services for and associated with them from bribing others. The 45 page guidance has illustrative case studies. The Act deals only with the new offence of bribery and is not concerned with fraud, theft or money laundering offences. Facilitation payments remain bribes. Section 7 provides for the offence of bribery which can be committed by commercial businesses of all sizes which fail to have in place adequate procedures to prevent persons associated with them from bribing another person on their behalf. Its scope extents to cover top management, company directors, employees and agents who perform services on behalf of their businesses. There is also a 9 page 2011 Quick Start Guide
There may be a defence if the commercial business is able to show it had adequate bribery prevention procedures in place within its organisation, although this will be tested to its full extent in court in time. See the report "Avoiding Corruption Risks in the City: The Bribery Act 2010" prepared for the City of London Corporation by Transparency International in May 2010 here. There are 9 scenarios, some followed by examples and case studies, tables and charts and 4 Appendices. Page 9 provides a summary of the four offences and penalties under the new Act. Page 11 considers the application of the Section 7 offence to companies, partnerships or part of a business in the UK and exposure through subsidaries with a scenario for liability of a parent company's actions elsewhere under English law. For 'Perceived Corruption Risk' in the City of London sub-sectors, see Table 2 page 22. For employment contracts policies, Appendix D at page 60 provides a © Transparency International 2009 Anti-Bribery 20 Point Checklist.
Employees and directors constitute one of the most valuable assets of a commercial business. Employment law changes frequently as does the approach taken by Courts and Tribunals towards construction of terms and conditions of employment; e.g. non-competition or non-compete covenants and restrictions in service agreements of directors, key employees, senior management and other employees with access to sensitive confidential information or proprietary information. In financial services firms or regulated firms, the employment terms for persons holding nominated appointments or controlled functions (e.g. Money Laundering Reporting Officer or FCA CF11) should have appropriate provisions to deal with their additional regulatory duties and responsibilities.
Employers should review their employment contracts and service agreements annually and update these as appropriate. Amendments and changes to terms of employment should however be approached with care to avoid a breach of contract which could result from unilateral amendments in the absence of contractual provision or agreement between employer and employee. In certain circumstances, this could lead to employment claims e.g. wrongful dismissal, unfair dismissal or unfair selection for redundancy or repudiation of the employment contract by the employer. The potential liability from claims includes the maximum limit for compensation for unfair dismissal as provided in annual changes in legislation (see below).
Who is the Employer?
On 18 May 2007, the Employment Appeal Tribunal held in the case of Consistent Group Ltd -v- Kalwak and Others and Welsh Country Foods Ltd that agency workers were employed by the employment agency regardless of the fact that it was the company where they were sent to work which exercised control over their day to day work. This case was decided on the facts surrounding the dispute and may not apply to other relationships between an employment agency and their temporary workers.
An Employee under EU law
On 28 October 2014, the Court of Appeal held in Halawi v WDFG UK Ltd t/a World Duty Free  EWCA Civ 1387 that a beauty consultant who provided her services through a limited company for the purpose of selling cosmetic products in an airport duty free outlet 'airside' (store area beyond the security gates) at Heathrow managed by WDFG was not an employee of WDFG and could not claim she was dismissed from employment when WDFG removed her airside pass nor could she be discriminated on race and/or religious grounds under Section 83(2) of the Equality Act 2010. Lady Justice Arden in her judgment held that the existence of the relationship of employment does not turn on whether the parties entered into a formal contract which would be recognised in domestic law as constituting employment but on whether it meets the criteria laid down by EU law. The criteria for the relationship of employment under EU law requires that a putative employee should agree personally to perform services and be subordinate to the employer, that is, generally to be bound to act on the employer's instructions. In determining whether a relationship is one of employment, the Court must look at the substance of the situation. In this case, there was no contract between Mrs. Halawi and WDFG. The Employment Tribunal's findings of fact showed the criteria under EU law had not been satisfied. Mrs. Halawi did not agree to personally to perform services nor was she controlled by WDFG over how she worked except that WDFG had the right to restrict her access to airside area as manager. The appeal was dismissed.
Managing Company Directors and Senior Employees
As for directors' service agreements and senior bank employees' contracts with contractual bonus provisions, the employer's exposure on risk of liability for breach of implied and express terms and wrongful dismissal claims remains as wide as the terms in the employment contracts will permit under employment law in the absence of a negotiated settlement agreement. Employees are valuable assets but are also part of your business risks and liabilities.
Shadow Directors & Service Agreements
Under section 230 of the Companies Act 2006, a shadow director (a person in accordance with whose directions or instructions the directors of the company are accustomed to act excluding professional advisors) will be subject to the same provisions governing directors' service contracts which means a company must keep available for inspection a copy of a shadow director's service contract or written memorandum of the terms of the service contract. The same provision also provides for notification by the company to the Registrar of the place where the memorandum is kept if it is other than at the company registered office. Non-compliance is an offence and every officer of the company in default is liable on conviction to a fine.
Contact James Chan & Co for preparation or review of directors' service agreements, employee employment contracts and your staff handbook. If a potential claim has already arisen, we can advise on contractual and statutory rights, settlement terms and prepare settlement agreements with a view to avoiding the time and publicity of litigation.
Is a Director and Majority Shareholder an Employee?
On 2 April 2009, the Court of Appeal decided in Secretary of State for Business, Enterprise and Regulatory Reform v Richard Neufeld  that there is no reason in principle why a person who is a director and shareholder of a company (whether a majority shareholder or one with total control) could not also be an employee under an employment contract within the definition in section 230 Employment Rights Act 1996 and therefore entitled to statutory protection under English employment law. This case concerns the circumstances in which a director and majority shareholder of a company may be regarded as an employee for the purpose of a claim against the Secretary of State pursuant to Section 182 of the Employment Rights Act 1996 as statutory guarantor for certain categories of unsatisfied debts owed to employees on an employer's insolvency. Consideration had to be given to determining whether the subject employment contract was a genuine contract or a sham and whether the relationship was one of an employee's employment contract or a contract for services.
Employee Shareholder - September 2013
Section 205A of the Employment Rights Act 1996 will come into effect on 1 September 2013 introducing a new employment status, the Employee Shareholder. This type of employee gives up by way of exchange certain employment rights to unfair dismissal claims and statutory redundancy payments in consideration of shares worth at least £2,000 in the employer company subject to certain protective provisions including a requirement to take legal advice and the right to a statement setting out details of the shares to be allotted to the employee.
Can a Controlling Shareholder be an Employee?
The Court considers the controlling shareholding in a company to be relevant and possibly decisive in determining whether a contract of employment exists. An individual who holds controlling shares in a company may raise doubts as to whether he can be considered to be an employee of the company he controls. On 29 February 2008, the Employment Appeal Tribunal decided in the case of J E Clark v Clark Construction Initiatives Ltd and Utility Consultancy Services Ltd, that the mere fact an individual has a controlling shareholding in a company or that he is an entrepreneur or has built the company up or will profit from its success, does not prevent a contract of employment from arising. On 11 April 2008, in the case of R Neufeld v A& N Communications in Print Ltd (in liquidation) and Secretary of State for Trade & Industry, the Employment Appeals Tribunal decided that a shareholder holding 90% of the shares in a company was also its employee. The fact the individual concerned offered a bank guarantee for the company's debts was not in itself inconsistent with there being in existence an employer employee relationship or an employment contract.
Qualifying Period for Unfair Dismissal Claims
With effect from 6 April 2012, the qualifying period entitling an employee to bring a statutory claim for unfair dismissal (including a written statement setting out the reasons for dismissal) will increase to two continuous years of employment. This change will apply to employees who commence employment or start work on or after 6 April 2012. For those already in employment on 5 April 2012 or who have been transferred to a new employer under the Transfer of Undertaking (Protection of Employment) Regulations ('TUPE'), the qualifying period of one year continuous employment continue to apply. From 25 June 2013, this two year qualifying period will not apply to employees who are dismissed unfairly for their political beliefs, opinions or affiliations.
There are exceptions to the requirement for qualifying period (e.g. dismissal of an employee on medical grounds requires only a month's qualifying period). Some dismissals are considered unfair without the need for a qualifying period of employment. For example, claims under the Equality Act 2010 for direct or indirect discrimination, discrimination arising from disability, pregnancy, harassment and victimisation and Regulations 10 to 14 and 16 Working Time Regulations 1998 (daily rest, weekly rest, rest breaks, annual leave, payment in lieu of annual leave, payment for annual leave).
Time Limits - Claims
Time limits within which claims arising from employment are to be brought and appeals against Employment Tribunal decisions lodged are strict and can be confusing. If in doubt, always treat time as of essence. Early legal advice should always be obtained.
The normal time limit for bringing a statutory claim for unfair dismissal is three months from the effective date of termination. The time limit is modified by the requirement for an employee to submit to the mandatory reconciliation process undertaken by ACAS. Time limits are strictly enforced by the employment tribunals. On 6 August 2007, the Employment Appeals Tribunal in London held in the case of 'Beasley -v- National Grid Electricity Transmissions' that a claim for unfair dismissal presented by email just 1 minute 28 seconds outside the three month time limit and the complaint was precluded from being considered by an Employment Tribunal.
Early Conciliation before Claim
From 6 May 2014, a person intending to bring an employment related claim in the Employment Tribunal must first to submit to a mandatory early conciliation process operated by ACAS. The aim is to allow ACAS to assist with promoting possible settlement of the dispute. A person may not bring an employment claim in an employment tribunal without complying with the requirement for early conciliation. The claimant submits notification to ACAS a completed Early Conciliation Notification Form setting out details of the employee, employer and employment or alternatively telephone ACAS for early conciliation with the required details. There is no requirement to set out the nature of the claim at this stage. There are exemptions to ACAS notification under The Employment Tribunals (Early Conciliation: Exemptions and Rules of Procedure) Regulations 2014. Separate EC Forms are required for each respondent the subject of a claim. Notification to ACAS should be made within the three month time limit for bringing an employment related claim in the Employment Tribunal.
ACAS will acknowledge receipt of notification of the EC Form and appoint a conciliation officer for the case who will contact the employer to see if it wishes to explore dispute resolution with a view to settlement. If the employer agrees to participate (and the employer is not obliged to), the conciliation officer will obtain details of the dispute from the parties and consider whether there is a reasonable prospect of settlement. If it appears that settlement is possible, the conciliation officer has one calendar month from the date of receipt of the EC Form or telephone notification to promote settlement. This one month period may be extended by a further 14 days by the parties' consent. If settlement is achieved, the terms will be recorded in a COT 3 Form or Settlement Agreement.
Should the employer decline to participate in the process or if at any time during conciliation either party withdraws from the process or the conciliation officer concludes there is no reasonable prospect of early settlement of the dispute, ACAS will issue an Early Conciliation Certificate with an unique reference number to confirm the end of the early conciliation process. The employee is then free to issue a claim in the Employment Tribunal. The issue of a claim does not preclude the parties from settling the dispute at any stage before the hearing.
The ET1 claim form must quote the EC unique reference number correctly to avoid rejection of the claim. An Employment Tribunal is entitled to reject a claim due to an incomplete EC unique reference number of the ET1 claim form. This decision was approved by the Employment Appeals Tribunal in Sterling v United Learning Trust UKEAT/0439/14/DM on 18 February 2015.
The three month time limit for bringing a claim in the Employment Tribunal, which starts to run from the effective date of termination of employment, is suspended during the period from the employee's notification to ACAS to issue of the Early Conciliation Certificate. The remainder of the time limit resumes running from the date the Early Conciliation Certificate is issued. If the three month time limit expires during early conciliation, the claimant will have an extension of a calendar month from receipt of the early conciliation certificate to issue a claim in the Employment Tribunal.
Contact James Chan & Co for early advice on settlement terms or the bringing or defence of employment related claims in the Employment Tribunal or High Court.
Claims which arise from a breach of the terms in an employment contract do not require a continuous period of employment as such contractual rights apply to bind the employer and employee as parties to the contract from the day it takes effect.
Claims for wrongful dismissal or wrongful constructive dismissal in breach of contract under common law are treated differently from statutory claims for unfair dismissal. Different time limits for claims against an employer apply. As a general rule, Employment Tribunals now have concurrent jurisdiction to hear wrongful dismissal claims subject to the amount of compensation they can award. There are certain claims which must be brought in court, even if the sums claimed are within the power of the employment tribunal to award, e.g. issues relating to restrictive covenants, personal injury and intellectual property rights claims.
If the amount of compensation exceeds the maximum amount the Employment Tribunal has power in law to award, the wrongful dismissal claim may be brought in court and a six year time limit for bringing claims would normally apply. If the wrongful dismissal claim is brought in the Employment Tribunal, an employee has three months from the effective date of termination of employment to bring a contractual claim and the employer will have six weeks from the date the employer received a copy of the employee's claim to counterclaim against an employee for breach of contract.
On 25 June 2013, Sections 17 to 20 of the Enterprise and Regulatory Reform Act 2013 comes into force and makes changes to the law on whistleblowing claims. For a disclosure to be protected, the disclosure must in the reasonable belief of the employee making the disclosure be in the public interest. In addition, there is no longer a requirement for the disclosure to have been made by the employee in good faith if it was in the employee's reasonable belief to be in the public interest. However, a Tribunal may, if it considers just and equitable in all the circumstances to do so, reduce any award it makes up to 25%. So, although good faith is no longer a requirement, it remains a consideration in the award. Other changes include an extension of the meaning of a 'worker' making a protected disclosure. A worker has the right not to be subjected to any detriment by any act, or deliberate failure to act, done by another worker in the course of that other worker's employment or by an agent of his employer with the employer's authority. For financial services firms, the changes in whistleblowing law apply only to workers and employees making a protected disclosure against their employers or agents of their employers. You may wish to see our Financial Services section commenting on the FCA's proposed protection for individuals whistleblowing on rival regulated firms. Appropriate policies and terms may have to be included in employment contracts and service agreements of financial services firms.
During the previous years, the FCA has seen enforcement action in the form of fines against institutions for financial market manipulations (LIBOR and FOREX). The FCA's desire to place a formal whistleblowing mechanism to shield informers who inform the FCA about misconduct at a rival firm in the same way as individuals who whistleblow on their employers (a form of self regulation within the industry if you like) may still need to address the potential risks to the reporting regulated firm. Even if misconduct is proved, the employer of the reporting individual employee making the 'whistleblowing disclosure' may not be protected against legal action for damages.
Void Employment Contract Terms
There are some employment terms, if included in employment contracts, which are void and unenforceable by law such as the restriction on industrial action or terms which are discriminatory in nature or effect. Examples of employment contract terms which are void in law include terms which:
(1) require an employee to become, or to remain, a member of an occupational pension scheme to which the employee is obliged to contribute.
(2) excludes or restricts an employer's liability for death or personal injury due to negligence or, except in cases where the requirement for reasonableness under the Unfair Contract Terms Act 1977 are satisfied, for other loss or damage.
(3) require an employee to exclude or limit the operation of statutes enacted for the employee's protection. This does not apply to settlement agreements where the terms therein have been agreed between the employer and employee and the relevant statutory provisions in the applicable employment laws relating to validity of a settlement agreement are complied with.
Contact James Chan & Co by telephone or email at first instance with details of your requirements for review or audit of your existing employment contracts or directors service agreements, the preparation of fresh contracts or to discuss possible solutions to potential disputes and claims and legal commercial advice on settlement agreements.
Variation of Employment Contracts
Clear drafting in an employment contract is require for unilateral variation by the employer. In a dispute, decisions often turns on the factual circumstances on a case by case basis and it is down to the construction of the wording relied upon by the employer seeking unilateral variation. On 15 December 2014, the Employment Appeals Tribunal (EAT) overturned the decision by the Employment Tribunal in Norman and another v National Audit Office UKEAT/2014/0276/14/BA, a case concerning a breach of contract by reason of unilateral and non-consensual variations of terms of employment by the reduction of the extent of paid sick leave and a reduction in privilege leave. The Judge at first instance found that an employer could unilaterally vary an employment contract if there were terms in the letters of appointment of the employees, incorporated into the employment contract, that enabled the employer to vary the contract unilaterally such as terms and conditions made "subject to amendment" with significant changes "notified" to staff. The EAT disagreed. On construction of the clauses, the appeal Judge concluded that the wording was nowhere clear and unambiguous as required.
In R. Robinson v Tescom Corporation before the London Employment Appeal Tribunal on 3 March 2008, a manager's terms of employment were varied to the extent that it involved more travelling on business in the course of his employment. The manager believed this was a unilateral variation which was a breach of his contract and he had been dismissed from his original contract of employment. He however continued to work in accordance with his original terms and under protest. A grievance was raised. He was called to a disciplinary hearing and subsequently dismissed for gross misconduct in failing to comply with the employer's legitimate and reasonable instructions. The dismissal was held to be fair by the Employment Tribunal and his appeal to the Employment Appeals Tribunal was dismissed by the Honourable Mr. Justice Elias. The fact the manager had agreed to continue working after the unilateral variation prejudiced his case. He could not continue to work under the new terms, even under protest, and yet insists on working in accordance with the original terms of employment. By doing so, he opened himself to dismissal for gross misconduct. This case must be considered on its facts and should not be taken as authority for an employer's unilateral variation of terms of an employment contract.
Bonuses, Unfair Dismissal and Unfair Contract Terms
On 17 November 2006, the Court of Appeal in London held in the case of Commerzbank AG v James Keen that Section 3 of the Unfair Contract Terms Act 1977 (on liability arising under contract) does not apply to employment contracts as employees do not "deal as a consumer" with their employer. In this case, an ex-employee with a basic annual salary of £120,000 was eligible to participate in a discretionary bonus scheme. The terms stated that no bonus will be paid if on the date of payment of the bonus the employee was not employed by the Bank or if he was under notice to leave the Bank's employment. Mr. Keen was made redundant on 10 June 2005 before the Bank's bonus payment date in March 2006. Mr. Keen claimed breach of contract, under-payment and non-payment of annual discretionary bonuses under the term providing for entitlement to a discretionary bonus. It was claimed the Bank could not rely on the term (under UCTA 1977) which provided that no bonus would be paid if an employee was no longer employed by the Bank. Hence, the employer was in breach of contract and not entitled to exclude or restrict any liability in respect of the breach or to claim to be entitled to render a contractual performance substantially different from that which was reasonably expected of the employer, or in respect of the whole or any part of the employer's contractual obligation, to render no performance at all by non-payment of the bonus.
If you have been unfairly dismissed and deprived of your bonus entitlement just before the date your employer was due to declare and distribute the company bonus or if you believe you were discriminated against in the distribution of bonuses, you may have a claim. To extinguish your right to bring employment related claims, a compromise agreement with terms favourable to the employer, some of which could be penalty clauses and thus unenforceable, may be offered for your acceptance. Contact us for advice on your rights and for independent legal advice on the terms offered to you in a compromise agreement.
Employment Rights - Agency Worker to Employee
If an agency worker were to work for an end-user employer (agency's client) over several periods and then taken on as an employee, would the periods worked as an agency worker count towards the one year qualifying period so as to entitle him or her to statutory protection from unfair dismissal? In the case of Wood Group Engineering (North Sea) Ltd -v- Karen A Robertson, the Employment Appeal Tribunal considered whether there was an implied contract of employment between an agency worker and the end-user employer, when the agency worker was dismissed less than one year after she was taken on as an employee by the end-user. The main legal issue was whether the periods of employment as an agency worker should count towards her one year continuous employment. In this case, there were contractual arrangements and obligations between the agency and the end-user employer and between the agency and the agency worker which governed the relationship between the parties regarding control over the agency worker and mutuality of obligations. The Employment Tribunal at first instance decided there was an implied contract of employment during the period when Ms. Robertson worked as an agency worker because the end-user employer exercised control over her work and there had been mutuality of obligation between the parties. The end-user employer appealed against the decision. On 6 July 2007, the Employment Appeal Tribunal rejected the decision of the Tribunal. It disagreed there was an implied contract of employment given the tripartite contractual agreements and held the period of continuous employment commenced only when the agency worker was taken on as a full time employee and not before. Consequently, Ms. Robertson was not entitled to statutory protection from unfair dismissal, given the facts of her case.
Paid Annual Leave Entitlement
There have been more changes to the Working Time Regulations 1998. On 1 April 2009, the minimum annual paid leave entitlement for full time and part time employees will be increased from 24 to 28 days (pro rated for part timer workers who are entitled not to be treated unfavourably) or 5.6 weeks on the basis of five working days a week. The annual leave entitlement includes public and bank holidays. The law provides for minimum annual paid leave but an employer may increase leave entitlement in its employment contracts. Paid leave entitlement starts to accrue on the date of commencement of employment.
Annual leave accrues even though an employee is on long term sick leave and is absent from work throughout the leave year concerned. Employers are legally obliged to allow an employee on long term sick leave to carry forward accrued annual leave into the following leave year. This raises the question as to the treatment of an employee taken sick over a period whilst on annual leave. The recent view of the European Court of Justice in Pereda v Madrid Movilidad SA (2009) is to treat the period concerned as sick days, subject to the employee complying with notification and evidence requirements of the employer's sick pay scheme or statutory sick pay. The court's decision is legal authority that such an employee is entitled to take an equivalent period of annual leave after he is fit to return to work and, if necessary, such leave may be taken in a subsequent leave year. We recommend employers review and amend their employment contracts and policies accordingly. These changes will affect calculations of payment in lieu of annual leave entitlement that has accrued but untaken on termination of an employee's employment and should be taken into consideration in the terms of a compromise agreement.
Paid Annual Leave Calculation 2014
Following the ruling by the European Court in May 2014 in the case of Lock v British Gas that commission, which an employee would have earned during annual leave had he or she not taken leave, should be included in the calculation of holiday pay. the Employment Appeal Tribunal handed down its judgment in Bear Scotland v Fulton on 4 November 2014 that UK workers and employees are entitled to be paid a sum of money reflecting non-guaranteed overtime work (required by employer), allowances and commissions as part of their 20 mandatory paid annual leave.
This means non-guaranteed overtime, allowances and commission etc. should be included when calculating the level of holiday pay for the 20 days mandatory paid annual leave under the Working Time Directive only (not when calculating the 8 days of annual leave added by the UK under Regulation 13A of the Working Time Regulations). Uncertainty remains on voluntary overtime which was not considered. At present, the decision:
(1) limits claims for arrears of holiday pay to deductions or a series of deductions. If there is a gap of more than 3 months in any deduction or series of deductions, the employment tribunal will not have jurisdiction to hear the claim for underpayments. (This aspect of the judgment may be subject to appeal to the Court of Appeal).
(2) restricts employees from retrospectively designating which holidays formed part of the 20 mandatory paid leave.
National Minimum Wage Hourly Rates 2015
The Department for Business, Innovation & Skills announced on 17 March 2015 that from 1 October 2015, the national minimum wage will be raised from £6.50 to £6.70 per hour for 21 years of age and over; for those between 18 and 20 years of age, the increase is from £5.13 to £5.30 per hour and for those aged between 16 and 17 years of age from £3.79 to £3.87 per hour. Apprentices will see an increase from a minimum hourly rate of £2.73 to £3.30. The accommodation offset increases from £5.08 to £5.35.
Compensation Limits for Unfair Dismissal 2015
On 6 April 2015, the Employment Rights (Increase of Limits) Order 2015 came into effect. It increased the compensation limits of Employment Tribunal awards. For an unfairly dismissed employee, he maximum compensation will increase from £76,574 to £78,335 or 52 weeks salary, whichever is lower under the Unfair Dismissal (Variation of the Limit of Compensation Award) Order 2013. This means the maximum compensatory award for unfair dismissal is capped at the employee's annual salary if it is lower than £78,335 or at £78,335 if the employee's salary is higher than the maximum limit. These new rates apply to claims where the cause of action (e.g. effective date of termination in an unfair dismissal claim) falls on or after 6 April 2015. The maximum limit on the amount in respect of a week's pay for the purpose of calculating a redundancy payment or for various awards including the basic or additional award of compensation for unfair dismissal has been increased from £464 to £475. The minimum basic award in unfair dismissal in relation to health & safety, employee representative, trade union or occupational pension trustee reasons is now £5,807. There are no statutory limits on compensation claims for unfair dismissal based on sex, race, disability discrimination under the Equality Act 2010 or for termination for a reason connected with a protected disclosure or whistle blowing under the Public Interest Disclosure Act 1998.
Settlement Agreements and Employment Claims
If you need advice on your rights on the terms of a settlement agreement (previously compromise agreement) and/or the validity of contractual terms in your employment contract or director's service agreement or you wish to consider bringing an employment law related claim or breach of contract claim, contact James Chan & Co with a copy of your employment contract terms and background details to your dispute for a preliminary view on your position.
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