January Legal Alert
Case law: Worker may carry holiday forward if prevented for any reason from taking it
Workers prevented from taking holiday for a reason beyond their control may be able to carry forward their holiday, even if they have not specifically requested to, and even if the reason is not the worker’s sickness.
Workers prevented from taking holiday because they were sick have been permitted by law to carry it forward and take it at a later date, without the worker having to specifically request permission to do so. However, it was thought this did not apply if they were prevented from taking holiday for any other reason.
In a recent case, a commission-only salesman worked for his employer for around 13 years. He took holiday each year but did not receive holiday pay. He was dismissed and claimed unpaid holiday pay. He argued that he would have taken more time off but:
- He had to give notice before taking holiday, to ensure there were enough sales people working at any one time
- He was not paid commission if he did not work
- He did not know he was entitled to holiday pay
There was no suggestion he had ever been prevented from taking holiday because of sickness.
The Employment Appeal Tribunal (EAT) said the key question was whether the salesman had been prevented from taking paid leave because of circumstances beyond his control. Significantly, it seemed to accept implicitly that, if that was the case, he could carry forward his entitlement to paid holiday even though he had been prevented from doing so by a reason other than sickness.
If that is correct, it seems workers can now carry forward entitlement to holiday if they have been unable or unwilling to take their holiday for any ‘reason beyond their control’, and not just if prevented from doing so by sickness.
In this case the EAT said the Employment Tribunal should have assessed what would have happened had the worker asked to take holiday. If he was prevented from exercising his right to holiday he could carry forward his entitlement. If he was merely choosing not to take holiday of his own volition, he could not.
The EAT also ruled that the correct claim was for compensation for refusal to allow the worker the right to take holiday, not for unlawful deduction of wages because of the employer’s failure to pay holiday pay.
- Employers should ensure there are no reasons beyond their workers’ control – whether sickness or any other reason - which prevent them from taking holiday, or risk workers being able to carry forward holiday without having to specifically request that they can.
Case ref: The Sash Window Workshop Ltd & Anor v King  UKEAT 0057_14_0112
Case law: Court clarifies when powers in a contract are discretionary and must be exercised rationally and in good faith
Contractual parties will welcome High Court guidance on how to identify when their contract gives one party a discretion, which must therefore be exercised rationally, in good faith.
The contracts of employment of two bank employees entitled them to a bonus payment based on a percentage of the ‘economic value added’ (EVA) created by the part of the business in which they worked. The calculation of EVA was based on accounts prepared by the bank for this purpose.
The bank calculated the EVA for 2010-2011 at nil and said no bonus was payable. The employees resigned, claiming there should have been a bonus pool of over £8m.
One of their arguments was that their employer had a discretion how EVA was calculated- ie what was in the accounts - and there was an implied duty in law to exercise a discretion in a contract rationally and in good faith.
The bank argued that while it had to make judgements about the content of the accounts, and different people might reasonably make different judgements, this was not the same as exercising a discretion. The implied duty did not therefore apply.
The High Court accepted how EVA was calculated but ruled that the bank was still exercising a discretion when determining EVA, which it therefore had to exercise rationally, in good faith, for proper purposes and not in an arbitrary, capricious or irrational manner. It ruled there was a discretion in a contract for these purposes if:
- The contract gave one party responsibility for making an assessment or exercising a judgement on a matter which materially affected the other party's interests
- There was ample scope for reasonable differences of view
- The party’s decision was final and binding on the other
It also said that, if the discretion was being exercised in relation to the other party’s employment, these factors were buttressed by the duty of mutual trust and confidence. However, the court ruled that the bank had exercised its discretion in accordance with its implied duty to act in good faith, etc. The employees therefore had no right to a bonus in that year.
- Parties entering into, or subject to, contracts that include provisions that satisfy the factors above should recognise they may be subject to an implied duty to act in good faith when making an assessment or exercising their judgement under the contract
- Any exclusion or limitation on these implied duties should be clearly and unambiguously set out in the contract
Case ref: Brogden and another v Investec Bank plc  EWHC 2785
Case law: Agreement to buy shares was legally binding, despite failure to sign formal written document
Parties negotiating a contract should make it absolutely clear at all stages whether they have actually concluded their agreement, following a High Court decision.
Before he died, a shareholder had been negotiating a sale of his shares in a company to a close friend. A formal written agreement had been drafted, but not signed. After the shareholder’s death his executor claimed that the parties had reached a legally binding oral agreement before he died, and the draft written agreement was simply a record of it. The close friend was therefore legally bound to buy the shares.
The friend claimed that there was an implied condition that negotiations had been conducted ‘subject to contract’, so there was no binding oral agreement.
The High Court ruled that the parties had reached a complete and binding agreement before the shareholder’s death, despite not having signed a formal written document. Even at the point when the shareholder had still been alive and there were still outstanding issues (such as accountancy advice, which entity was actually going to buy the shares and the production of a formal written document recording their agreement), the terms of the agreement had been certain enough to be enforceable in court and either party could have obtained an order for specific performance –requiring the other to perform their contractual obligations.
By the time the shareholder died, even those outstanding issues had been sorted out and there were no further terms requiring negotiation – the written document was merely a record of what had already been agreed.
The fact that the friend had pressed for documentation of the agreement in a formal written document was not an unequivocal indication that he regarded it as legally binding only when the written document had been signed.
The Court made the point that its decision might have been different had the agreement been between unrelated parties: ‘Whilst it might have been imprudent for both parties to enter into an informal binding agreement for the sale of the shares (and therefore not likely to be what was intended) if this had been an arms-length transaction between “strangers”, this was not such a case. They were very good friends, who, no doubt, trusted each other entirely. There was no need for “due diligence” or any vendor’s warranties.’
- Parties negotiating a contract should ensure it is absolutely clear at all stages whether they have actually concluded an agreement, whether orally, in writing - or even partially.
Case ref: Williams (as executor of the estate of Batters deceased) v Jones (25 February 2014)
Case law: Court refuses to imply term requiring ex-director to return confidential documents and copies after termination of employment
Employers should ensure all contracts of employment require directors and employees to deliver up confidential documents on termination, after the High Court refused to imply such a term into a director’s contract.
A director’s employment was terminated. His contract of employment stated that information he had acquired while a director was confidential, and should not be used or disclosed to any third parties. However, the contract did not specifically require the director to deliver up confidential documents or copies. The employer argued there was an implied term that he should do so.
The High Court ruled there was no reason for implying such a term into the director’s contract.
- Employers should ensure that all contracts of employment protect the employer’s confidential information, both before and after termination of employment, and require them to deliver up all documents on termination.
Case ref: Eurasian Natural Resources Corporation Ltd v Judge  EWHC 3556
Case law: Variation of employment contract ineffective without reciprocal benefit to employee
An employer could not enforce a non-compete clause against a former employee as it had been included as a variation of the employee’s original contract - but the employee had received no reciprocal benefit for agreeing to the variation.
An employee worked for a business that passed to new owners after being family-owned and run. He was asked to sign a contract of employment which contained ‘restrictive covenants’ - a six-month non-solicitation clause, and a 12-month non-compete clause. He had not previously had a written contract and, therefore, had not previously been subject to restrictive covenants.
He left to join a rival business run by his sons, and his old employer tried to enforce the covenants. The court ruled that the covenants were not enforceable as the employee had not received any ‘real monetary or other benefit’ in return for agreeing that his contract be varied.
The business put forward several suggested benefits – including that the employee was unaware of when he signed the new contract, and others unrelated to his new terms of employment – but the court rejected them. It also rejected the suggestion that his continuing in employment amounted to a benefit for these purposes, as there had never been any suggestion he was at risk of dismissal if he refused to sign the new contract.
- Employers asking employees to agree variations to their contracts should ensure the employee is offered some benefit in return (other than continued employment), that relates to the new terms and that the employee knows about, or risk the variation being ineffective.
Case ref: Re-Use Collections Ltd v Sendall & Anor  EWHC 3852
Case law: Tribunal clarifies when staff are ‘workers’ for purposes of employment law
A plumber who largely behaved, and was treated as, an independent contractor but without an unqualified right to substitute someone else to do his work, was a ‘worker’ (although not an employee), the Employment Appeal Tribunal has ruled.
A plumber worked for a plumbing and maintenance company. He wore the company uniform and drove a van carrying the company logo. However, his written agreement with the company was consistent with him carrying on business as an independent contractor. He had a degree of autonomy over how much he charged and how he carried out his work: he submitted invoices for his work, paid his own tax and national insurance, was registered for VAT, had to provide his own tools, equipment and materials and carried his own insurance.
Although he was obliged to work a minimum number of hours per week, he could choose when he worked and could refuse particular jobs. The company was under no obligation to give him any work if there was none to give.
The Employment Appeal Tribunal (EAT) ruled he was not an employee, for reasons including that both he and the company acted as if he was an independent contractor. However, the EAT found he was a ‘worker’ because the parties’ expectation was that he would provide his services personally – he did not have the unqualified right to substitute someone else to do his work. The fact he could job-share or swap shifts did not amount to an unqualified right to substitute someone else to do his work, but at most a limited right to provide a substitute only with prior consent.
- Businesses should ensure they are clear which of their staff are employees, which are workers and which are independent contractors, taking into account whether or not they have an unqualified right to substitute someone else to do their work.
Case ref: Pimlico Plumbers Ltd & Anor v Smith  UKEAT 0495_12_2111
Case law: Tenant’s exercise of break clause ineffective because conditions not met
Tenants planning to exercise break clauses must ensure they comply absolutely and precisely with any necessary conditions or risk the break being ineffective, a Scottish legal decision has confirmed.
A tenant of two business offices under two separate leases purported to exercise break clauses to bring both leases to an end by serving the appropriate notices. A break clause allows a tenant to get out of a lease at certain points specified in the lease, provided the tenant meets certain conditions.
Under the lease terms, the breaks could only be exercised if the tenant was not in breach of any obligations ‘at the date of service of such notice and/or the termination date’. The landlord claimed the breaks were ineffective because the tenant was in breach of its repairing obligations at the date it gave the break notices. The tenant admitted it had been in breach at that time but, by the termination date, had spent £1.3m and complied with the repairing obligations.
The court ruled that the tenant’s exercise of the break clauses was ineffective and the tenant continued to be liable for rent for the full terms of the leases.
- Tenants wishing to exercise break clauses must ensure they comply absolutely and precisely with any necessary conditions, or risk the break being ineffective.
Case ref: Arlington Business Parks GP Ltd v Scottish & Newcastle Ltd  CSOH 77
Case law: Employee’s depression and anxiety disorder did not amount to a disability for employment law purposes
An employer has successfully defended a disability discrimination claim, arguing that an employee’s depression and anxiety disorder was not a disability.
An employee had a depressive and general anxiety disorder. He claimed disability discrimination but his employer argued he was not disabled for employment law purposes. Someone is defined as ‘disabled’ if they have a physical or mental impairment which has a substantial and long-term adverse effect on their ability to carry out normal day-to-day activities.
The Employment Tribunal (ET) ruled that although the employee had an impairment, it did not have a substantial or long-term effect on his ability to carry out normal day-to-day activities.
On appeal, the Employment Appeal Tribunal said the ET had properly assessed the impact of his impairment at work, including its effect on his concentration, ability to communicate with colleagues and ability to access his workplace. It had also considered whether the impairment was ‘long-term’ – taking into account that an impairment fluctuating over time could still be ‘long-term’.
- Employers faced with disability-related claims by employees should assess whether every element of the current definition of disability is met by the employee. If they are, he or she is likely to be disabled for employment law purposes.
Case ref: Saad v University Hospital Southampton NHS Trust & Anor  UKEAT 0184_14_0412
Case law: Directors who abrogate responsibility for key tasks liable to disqualification
Directors who delegated responsibility for key issues to non-directors without monitoring and reviewing the situation, were disqualified as unfit to be concerned in the management of their company, following a High Court ruling.
A father and son were managing and sales director of their company respectively. As a result of financial difficulties the company entered into an invoice discounting agreement with a finance company. This allowed it to draw money equal to a percentage of its unpaid invoices to customers, using the unpaid invoices as collateral. This was critical to the continued operation of the company’s business.
The finance company ended the agreement, claiming the company had breached its terms. The company went into administration.
In proceedings to disqualify both directors as unfit to be concerned in the management of a company it was alleged the father had:
- Changed the dates of invoices (‘re-aged’ them)
- Delayed issue of credit notes
- Assigned invoices before the company had delivered the goods
- Not reported customer rebates to the finance company
All of these had the effect of increasing the apparent amount of unpaid invoices, and therefore the amounts the company was able to draw down under the agreement. It was alleged that the son was unfit to be concerned in the management of a company because he had allowed these breaches to occur. Both directors claimed that the breaches of the agreement were the fault of the company's finance manager.
The court found that the father had been hands-on, and knew of or authorised all or some of the breaches (although it was likely he didn’t realise they were breaches). He had also failed to investigate complaints from the finance company, introduce internal controls to ensure the agreement was not breached, investigate how the finance manager was running his department, or to hold any board meetings which could have reviewed the way the agreement was working.
It found that the son had failed to investigate the finance company’s concerns about the way the agreement was working, or to keep himself informed of the company’s financial situation generally.
The court disqualified the father for six years and the son for three years for falling short of the minimum duties required of a director. Particularly, it said that directors could not discharge their duties simply by delegating a matter to someone else and then abrogating responsibility for it.
Directors should ensure:
- There are systems and controls that ensure they monitor and review key aspects of their company’s business, including agreements with outsiders, and investigate and involve themselves where necessary, even where they have delegated responsibility for them to others
- They are receiving, understanding and acting on relevant financial information about the business generally
- They hold regular board meetings
Case ref: In the Matter of R D Industries Ltd sub nom Secretary of State for Business, Innovation & Skills v (1) Roger Lionel Dymond and (2) Michael William Dymond  EWHC 2844
New guidance: Restrictions on amounts charity subsidiaries can lawfully donate to their parent charity
Charities which set up wholly-owned trading subsidiaries (because the charity itself is not allowed to trade) which then donate all their cash to the charity may find the subsidiary can donate less in future following a new interpretation of company law rules.
It is unlawful for a company to make a distribution to its members unless it has sufficient distributable profits to fund the distribution. Historically, however, Charity Commission guidance has always said the donation of cash from a wholly-owned subsidiary to its charity parent is not a ‘distribution’ - so the subsidiary can donate monies even if they exceed its distributable profits.
The Institute of Chartered Accountants in England and Wales has now issued a technical release giving its opinion that such donations are distributions after all. This would mean any donation by a wholly-owned trading subsidiary to its parent charity is unlawful to the extent it exceeds the subsidiary’s distributable profits.
The Charity Commission has withdrawn the relevant part of its guidance on this issue. HM Revenue and Customs (HMRC) has also said it will consider this issue and provide its own guidelines on the tax implications for charities and their subsidiaries.
Charities that have received donations exceeding the subsidiary’s distributable profits should consider specialist professional advice on whether they need to:
- Budget for liabilities arising from donations exceeding distributable profits
- Make prior year adjustments in its accounts for donations in previous years that exceeded distributable profits
- Return the excess to its subsidiary – or whether they can treat it as a dividend, and set it off against future lawful distributions/donations. However, the attractiveness of each option will depend on the HMRC’s proposed guidelines
New rules: Government announces rule changes to benefit developers
Developers will welcome proposed changes whereby section 106 planning agreements will not be sought for developments below a certain size.
A section 106 agreement is an agreement under which a local authority can require a developer to mitigate the impact of a new development – for example, by making payments towards community, play educational or sports facilities, agreeing to restrictions on the development or use of land, tree planting or the provision of affordable housing as part of the development.
The Government has announced it intends to change the rules so that section 106 planning obligations will not be sought if:
- A development (including self-build) is for ten or fewer units and the maximum combined gross floor space is 1,000 square metres or less
- A development is in a designated rural area, is for five or fewer units and the local authority has chosen to implement this threshold. There is no maximum floor space limit. In designated rural areas where the authority has chosen to implement the five unit threshold, payment of section 106 planning contributions will be sought in cash - and deferred until the units have been completed
- A development comprises construction of an annex or extension to an existing home
The changes are not intended to apply to Rural Exception Sites.
However, local authorities will still be able to require developers to provide site-specific infrastructure such as street lighting if the development would not otherwise be acceptable for planning purposes, even if the development is below the new thresholds.
In addition, the Autumn Statement and the National Infrastructure Plan 2014 contained confirmation that the Government is to introduce the following changes to speed up section 106 negotiations:
- Revisions to guidance
- A faster negotiating process
- Setting timescales for agreement could be introduced
- Making use of section 106 funds more transparent
- Developers should factor the proposed changes into their business planning, as it may affect the nature and timing of future developments
Case law: Builders liable to flat owners under defective premises law despite no direct contractual relationship
Builders entitled to change the developer’s specifications during a development have lost a defective premises claim against them by flat owners after their changes resulted in flats that were ‘not fit for habitation’.
A developer contracted with a builder to construct two blocks of apartments. In order to do the work within the developer’s budget, the builder proposed significant reductions to the quality of the finish, and insisted on power to make change to the specification.
The apartments were built, and many were sold by the developer off-plan, so buyers did not see them until they were finished. The poor finish resulted in leaks, mould and condensation in apartments and in the common parts.
The flat owners had no new home warranties and the developer had gone into administration. They had no contractual relationship with the builder so could not bring a breach of contract claim against it. However, they took the builder to court under defective premises law under which any person taking on work for, or in connection with, the provision of a dwelling must ensure the work is done to an appropriate standard so that the dwelling will be fit for habitation when completed. The work must be done in a workmanlike or professional manner, and with proper materials, according to the standards at the time it was done.
The Court said the term ‘dwelling’ in this case meant an individual apartment – so it did not include the common parts. However, the work on the common parts was work ‘in connection with the provision of a dwelling’ (because flat owners had an interest in, and financial responsibility for, the maintenance and repair of the structure and the common parts of the buildings). The builder therefore owed the flat owners a duty of care in respect of it.
The Court also ruled that a dwelling was ‘fit for habitation’ if it could be occupied for a reasonable time:
- Without risk to the health or safety of anyone who might reasonably be expected to occupy the dwelling (which could include babies and people suffering from common health conditions, such as asthma), and
- Without undue inconvenience or discomfort to them
It also ruled:
- A dwelling could be unfit for habitation if there is a non-transient serious inconvenience – for example, a broken lift in high-rise flats
- If there are multiple defects, the court will look at the cumulative effect of them all
- A dwelling could be unfit for habitation even if the problem was easily remedied (although the easier the defect was to remedy, the lower damages would be)
The Court said a number of flats in this case were unfit for habitation because of defects in both the common parts and in each apartment. The flat owners were awarded the costs of remedying the defects, a sum representing the blight on the value of apartments and compensation for distress and inconvenience.
- Builders and others in the construction industry who are legally entitled to change a developer’s specifications should ensure their work will not create a risk of a defective premises claim against them by property owners with whom they have no contractual relationship.
Case ref: Rendlesham Estates plc & others v Barr Limited ( EWHC 3968 (TCC)
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