November Legal alert

legal alert

This month: 

  • Case law: Tribunal clarifies employee's duty to notify employers of reasons for absence from work for dependent
  • Case law: Court of Appeal confirms when it is reasonable to bring disciplinary proceedings
  • New guidance: Acas issues guidance on new shared parental leave rules
  • New guidance: Managers benefit from government guidance on workers using own devices for work
  • Case law: Employer not required to ignore disabled employee's final written warning in 'reasonable adjustment' claim
  • New legislation: Employers who force employees to make police 'data subject access requests' for criminal records may be criminally liable
  • New guidance: Information Commissioner's Office publishes guidance on keeping cloud data secure
  • New guidance: Acas publish new guidance on managing bereavement in the workplace
  • Case law: Employer not liable for health and safety risks shared by employees with members of the public generally
  • New rules: Patent Opinions Service changes make it easier to revoke patents
  • New legislation: New rules widen who can contest your will when you die
  • Case law: Court clarifies division of assets rules on divorce where spouse has built up successful business
  • Case law: Contract clause requiring 'friendly discussions' before arbitration is legally enforceable
  • Case law: Employer has to pay higher compensation for lost pension rights
  • Case law: Assignment of employee to client work must be conscious act of organisation for TUPE to apply
  • Case law: Patent not infringed because invention not properly described in patent registration
  • Case law: Variation of contract makes liquidated damages clause void
  • Case law: Shareholder subject to confidentiality clauses could not disclose company information even if recipient signed confidentiality agreement 
  •  

    Case law: Tribunal clarifies employee's duty to notify employers of reasons for absence from work for dependent 

    Employers will welcome clarity on when it is 'reasonably practicable' for an employee to contact them to explain absence from work, following an Employment Appeal Tribunal decision. 

    An employee had been issued with several final written warnings following absences from work. One Monday morning he went with his pregnant partner to hospital because of concerns about her health. He did not call work to explain his absence, but his father phoned in the afternoon and explained why his son was not at work. The employee and his partner later went home for the night. 

    The employee's partner was re-admitted on Tuesday to have the baby. The employee was away from work the whole day but failed to call the employer to explain his partner was having the baby. He was also absent on Wednesday. Initially, he did not call his employer, but then received a text from a colleague telling him to contact work urgently. He phoned, and was severely criticised for not calling in with reasons for his absence, which upset him. He called again that evening and left an answerphone message to say he would not be in on Thursday either. 

    The law says employees can take a reasonable amount of unpaid absence from work to deal with emergencies involving their dependents. However, they must tell the employer the reasons and how long they expect to be absent, as soon as 'reasonably practicable'. 

    At the disciplinary meeting, the employee said his phone battery had been flat on the Monday and he could not remember the work telephone number, so he had called his father from the hospital payphone to ask him to call work for him and explain. His father had done so, and told the employer the reason for his absence. 

    The employee was dismissed, and paid in lieu of notice. His internal appeal failed, and he claimed automatic unfair dismissal, on grounds he had been dismissed for taking time off to care for a dependent. 

    The Employment Appeal Tribunal (EAT) said that concerns over his partner's health and her having a baby were two different reasons for being absent from work, even though both arose because of her pregnancy. The employee should have notified the employer of the new reason on the Tuesday, but failed to. 

    The EAT also found that even if his mobile battery was flat, he could have used a payphone or borrowed a phone. It was therefore reasonably practicable for him to have contacted his employer earlier and his dismissal was not, therefore, automatically unfair. 

    Operative date

    • Now

    Recommendation

    • Employers should make sure employees absent from work because of family emergencies know they must contact work as soon as reasonably practicable, telling the employer why, and how long they will be absent. Employees should also be made aware they must notify the employer as soon as reasonably practicable of any fresh developments changing the reason they are absent, or their estimate of the time they will be away from work.

    Case law: Ellis v Ratcliff Palfinger Ltd [2014] UKEAT 0438_13_1709

     

    Case law: Court of Appeal confirms when it is reasonable to bring disciplinary proceedings

    Employers must be able to show that bringing disciplinary proceedings is, objectively, within the range of reasonable decisions to make in the circumstances, having made proper enquiries, the Court of Appeal has confirmed. 

    An employer, a university, alleged that a senior lecturer had written, and sent to another college, a misleading and inaccurate reference for a colleague overstating the colleague's qualities and qualifications. 

    The lecturer denied sending that reference. Drafts were discovered on her computer that were very similar, but she claimed these were suggested drafts sent to her by her colleague, which she had saved on her computer but not used. She claimed not to have saved the shorter reference she had actually sent. 

    The university brought disciplinary proceedings against her. Her hearing went ahead in her absence after she sent in a sickness certificate. The allegations against her were dismissed, but she did not return to work. Instead, she claimed breach of contract and negligence leading to personal injury on grounds it had been unreasonable of her employer to bring disciplinary proceedings without making proper enquiries first. 

    The Court of Appeal (CA) ruled that the test of whether it was reasonable to bring disciplinary proceedings was whether, from an objective viewpoint and without the benefit of hindsight, doing so was within the range of reasonable decisions open to an employer in the circumstances. 

    In this case, it said the trial judge, who had decided it was reasonable to bring disciplinary proceedings, had mixed up the question of whether the employer's decision to bring disciplinary proceedings was reasonable with the issue of whether the allegations made against the employee were true. The CA reversed his decision, and ruled that the university was not in breach of its duties. 

    Operative date

    • Now

    Recommendation

    • Employers should make sure they can show that a decision to bring disciplinary proceedings against an employee is, from an objective viewpoint, within the range of reasonable decisions for them to make in the circumstances, after making proper enquiries. 

    Case ref: Coventry University v Mian [2014] EWCA Civ 1275

     

    New guidance: Acas issues guidance on new shared parental leave rules

    Employers will welcome new Acas guidance to help them understand and comply with new rules on shared parental leave.

    The new rules come into force on 1 December 2014 and enable eligible mothers, fathers, partners and adopters to share parental leave between them after their child is born (or adopted) as long as they follow certain procedures. 

    The new guidance, Shared Parental Leave: a good practice guide for employers and employees includes a summary of the procedures, standard letters and a sample policy document.

    Operative date

    • Now

    Recommendation

     

    New guidance: Managers benefit from government guidance on workers using own devices for work

    Managers considering their organisations' 'Bring Your Own Device' (BYOD) policies can download new government guidance on security issues where employees use their own devices for work purposes. 

    BYOD issues are increasingly common as employers allow remote and flexible workers – and even permanent, on-site employees in some businesses - to use their own laptops, phones, tablets and other devices in their work. 

    The new guidance, BYOD Guidance: Executive Summary (part of a larger 'collection' of publications called Bring Your Own Device Guidance) aims to help organisations deal with key security aspects arising from allowing employees to use their own devices for work, and to minimise risk and maximise business benefit. 

    It includes guidance on: 

    • legal issues;
    • how to create an effective BYOD policy setting out the information workers are allowed to access and share;
    • how to encourage staff agreement;
    • how to limit information shared on devices;
    • alternative ownership models (such as offering work devices staff can also use for personal matters if they agree to certain controls);
    • how to plan for security incidents.

    Operative date

    • Now

    Recommendation

     

    Case law: Employer not required to ignore disabled employee's final written warning in 'reasonable adjustment' claim 

    An employer was not required to ignore a previous final written warning for disability-related absence when considering whether to dismiss a disabled employee for a subsequent absence unrelated to his disability.

    A disabled employee, who had been off sick for a total of 206 days in three years, was given a final written warning in September 2011. His absences were mainly due to his disability. He was dismissed a year later after being off sick for a further three months for reasons unrelated to his disability. 

    Employers are legally required to make 'reasonable adjustments' for disabled employees where a provision, criterion or practice (PCP) at work puts them at a substantial disadvantage compared to employees who are not disabled. If there is a PCP that puts them at a disadvantage, the law requires employers to take 'such steps' as is reasonable to avoid this. Whether an adjustment is 'reasonable' depends on the circumstances. 

    The employee claimed that a reasonable adjustment for the employer to make would have been to ignore his final written warning, given because of his disability-related absence, when considering whether to dismiss him for his non-disability-related absence. 

    The Employment Appeal Tribunal (EAT) disagreed. First, it doubted that ignoring a final written warning – a mental process - amounted to taking a 'step', as required by the law (although formally revoking the final written warning might have been such a step). Second, it decided that even if ignoring the previous warning did amount to taking a 'step', it would not have been a reasonable one to require the employer to take. 

    The EAT also said that had the matter been brought as a disability discrimination claim rather than a failure to make reasonable adjustments, it would have held the employee's dismissal was justified as a proportionate means of achieving the legitimate aim of ensuring attendance by employees at work. 

    Operative date

    • Now

    Recommendation

    • Employers with provisions, criteria or practices that put disabled employees at a substantial disadvantage compared to other employees should make sure they have identified all the 'steps' they might take in order to avoid this, and considered whether those steps are reasonable in the circumstances.
    • They should be aware that a 'step' means a practical action to be taken to avoid the disadvantage. A mental process, such as ignoring a previous final warning, is not usually sufficient.

    Case ref: General Dynamics Information Technology Ltd v Carranza [2014] UKEAT 0107_14_1010

     

    New legislation: Employers who force employees to make police 'data subject access requests' for criminal records may be criminally liable

    Employers who force employees or job candidates to make data access requests to the police for details of their convictions, and give the employer the results, will be committing a criminal offence from 1 December 2014. 

    Under data protection law, individuals can make data access requests to the police for information about their own criminal records, but not for those of other people. Some employers have therefore forced employees and/or job candidates to carry out their own requests, and to disclose the results. Under the new section 56 Data Protection Act 1996, this will amount to a criminal offence. 

    The penalty is a fine of up to £5,000 in the Magistrates' Court (soon to be unlimited); and an unlimited fine in the Crown Court. The Information Commissioner's Office has said it will prosecute businesses that ignore the new law. 

    Operative date

    • 1 December 2014

    Recommendation

    • Employers should review their recruitment policies, practices and procedures, and associated documents and templates, to make sure they do not require employees or candidates to carry out data access requests and disclose any resulting details of their criminal records.

     

    New guidance: Information Commissioner's Office publishes guidance on keeping cloud data secure 

    The Information Commissioner's Office (ICO) has issued new guidance, Cloud Computing, to help organisations using 'the cloud' to keep stored data secure.

    Data is stored in the cloud if you use a service that allows you to upload documents, photos, videos and other files to a website to share with others, or as backup copies. This data can then be accessed from any location or any type of device, such as a laptop, mobile phone or tablet.

    The ICO's guidance covers the data protection implications of using the cloud, and what to look out for in a cloud service to make sure it complies with data protection law.

    Operative date

    • Now

    Recommendation

     

    New guidance: Acas publish new guidance on managing bereavement in the workplace

    Employers will welcome a new Acas guide helping them deal with employees who have suffered bereavement.

    The new guidance, Managing bereavement in the workplace – a good practice guide, helps managers balance the needs of the employee suffering bereavement with the needs of the business, and to deal with the employee and their family and friends sensitively, whether the bereavement is of a family member or a colleague at work.

    The guidance covers the application of rules allowing: 

    • emergency time off to care for dependents;
    • requests for flexible working (which allow for reduced hours or working from home on a temporary basis, and can be used to help an employee through the bereavement period);
    • leave in certain circumstances following stillbirths and death of newborns.

    The guidance points out that employees may have a right to compassionate leave under their contracts of employment. It also reminds employers of the potential for discrimination when dealing with requests for compassionate leave, given an employee's religion or the fact they may, as a result of bereavement, develop a disability requiring the employer to make reasonable adjustments.

    Operative date

    • Now

    Recommendation

     

    Case law: Employer not liable for health and safety risks shared by employees with members of the public generally 

    Employers are entitled to assume that employees will take their own precautions against health and safety risks they are exposed to during working hours, but which they share with members of the public generally and are not materially increased by their employment. 

    A home carer slipped on an icy path when visiting a client. She took legal action against her employer claiming breach of health and safety regulations, breach of rules requiring employers to provide employees with protective equipment in certain circumstances, and breach of its common law duty of care to her. 

    The Inner House of the Court of Session in Scotland found the employer had met its obligations under health and safety regulations by carrying out two 'suitable and sufficient' risk assessments, including assessing the risk of home carers slipping on snow and ice in the course of their employment. It was not necessary for the employer then to take any particular precautions as a result of the assessment's findings (although it may be required to under other regulations). 

    The protective equipment regulations require employers to provide employees with protective equipment if exposed to health or safety risks while 'at work'. The court said employers did not have to provide equipment if the risk did not arise specifically from the employees' work but was shared by members of the public generally, and was not materially increased by the nature of their employment. It was not enough that the employee was exposed to that risk during working hours.  

    Since slipping on an icy path was a risk shared equally with members of the public generally and the risk was not materially increased by the nature of the carer's work, the regulations did not require the employer to provide protective equipment. 

    Even if it had been a risk at work, the court ruled it would have found the employer had adequately controlled that risk because of the training it had given its employees on the dangers of icy paths. 

    The court also said the employer owed no common law duty of care to the employee in relation to this risk. Adults in Scotland had experience of negotiating snow and ice in an urban environment and employers were entitled to assume their adult employees could choose appropriate footwear themselves. 

    Operative date

    • Now

    Recommendation

    • Employers should make sure they carry out sufficient and suitable risk assessments and give employees appropriate training. However, they are entitled to assume employees will guard against risks shared by them and members of the public generally, which are not materially increased by the nature of their employment, even if those risks occur during the employees' working hours.

    Case ref: Kennedy v Cordia (Services) LLP [2014] CSIH 76

     

    New rules: Patent Opinions Service changes make it easier to revoke patents 

    Patent owners may find they are more vulnerable to claims that their patents should be revoked as invalid, following changes to the UK Intellectual Property Office (IPO) Patent Opinions Service. 

    The UK IPO has expanded and improved its Patent Opinions Service, including new powers for the IPO to start patent revocation proceedings itself. 

    The Service provides an opinion on whether a UK or European patent has been infringed, or is invalid (ie should never have been registered in the first place) and should be revoked. The aim is to help parties to a patent dispute decide whether to try to negotiate a settlement or start proceedings. Opinions are often sought by those accused of infringing a patent by attempting to escape liability by challenging the patent's validity. 

    Before 1 October 2014, if the opinion of the Patent Opinions Service was a patent was invalid, the person challenging the patent still had to make a separate court application for a declaration of invalidity. These could be expensive and time-consuming. 

    From 1 October the IPO can start invalidity proceedings to revoke a patent if, in its opinion, the invention it protects is 'clearly' not novel, inventive or capable of industrial application. This means a patent opinion may be a quicker, less expensive way for a challenger to invalidate a patent than bringing separate invalidity proceedings. 

    However, the patent owner can ask for the opinion to be reviewed first, and can present arguments against revocation, or apply to amend its patent to remedy the problem and avoid revocation. It can also appeal to the courts if the patent is revoked. 

    Operative date

    • 1 October 2014 

    Recommendation

    • Businesses wishing to challenge UK or European patents should, in clear-cut cases, consider using the Patent Opinions Service as a quicker and cheaper way to revoke a patent than starting invalidity proceedings in court.

     

    New legislation: New rules widen who can contest your will when you die 

    People making a will should consider the possibility of a wider range of family and dependents contesting their will, following changes to rules governing who can make claims for 'reasonable financial' provision from the estate. 

    Family members and dependents maintained by you can legally contest your will if they believe it does not make 'reasonable financial provision' for them. They can do so by applying to the court for a share of your estate on your death. 

    The law setting out who can make a claim, and what they are entitled to if they are successful, has changed recently: 

    • A child who is not your biological child, but whom you have treated as a member of the family (ie your relationship was like that of parent and child) can now make a claim, even if you were neither married to nor in a civil partnership with their parent. Previously, you had to be married to (or in a civil partnership with) the parent.
    • An individual 'maintained' by you can make a claim if you were 'making a substantial contribution in money or money's worth towards [their] reasonable needs'. The court will now consider not just whether you felt an obligation to maintain that person, but the extent to which you actually did.
    • Spouses and civil partners can still make a claim based on what they would have received if the relationship had ended in divorce or dissolution of the partnership, rather than death. However, under the new law "nothing requires the court to treat such provision as setting an upper or lower limit on the provision which may be made". So there is scope for spouses and civil partners to argue they should receive more, and for your executors to argue they should receive less.

    There are also changes to the time limits for making a claim.

    Operative date

    • 1 October 2014 

    Recommendation

    • People making a will should make sure they consider the possibility of claims from a wider range of family members and dependents when deciding who gets what in their will, to avoid time-consuming, upsetting and expensive claims against their estates when they die. Those who have already made a will should review it to reduce the risk of claims.

     

    Case law: Court clarifies division of assets rules on divorce where spouse has built up successful business

    A divorcing husband has failed to convince the court to depart from the usual 50:50 split of assets because of his role in building up his successful business. 

    A highly successful businessman divorced his wife. He argued their assets should be split 60:40 rather than the usual 50:50 division because: 

    • his success as a businessman meant he had made a 'special contribution' to the value of their assets;
    • he had started his business before the marriage and had therefore brought significant assets to the marriage that he should be given credit for in the divorce settlement;
    • the shares in his company he would receive as part of the settlement were much more risky assets than his wife would receive.

    The court ordered a 50:50 split and ruled: 

    • the fact someone was successful in business did not necessarily mean their contribution to the matrimonial assets was exceptional;
    • the business had not had been of significant value when he married – it had only grown during the marriage.

    However, in relation to the argument that the husband would get riskier assets on divorce, the court discounted the value of the company when calculating the total 'pot' to be shared between them. 

    Operative date

    • Now 

    Recommendation

    • Divorcing couples in circumstances where there is a family business should take account of this clear judgment when negotiating the division of matrimonial assets.

    Case ref: SK v TK [2013] EWHC 834

     

    Case law: Contract clause requiring 'friendly discussions' before arbitration is legally enforceable

    A clause in a contract requiring 'friendly discussions' before either party can start formal legal proceedings may be enforceable, as if it was a duty to negotiate in good faith. 

    An agreement for sale of iron ore contained a provision requiring the parties to enter into 'friendly discussions' before starting arbitration proceedings. A dispute arose and one party went straight to arbitration on grounds that the 'friendly discussion' requirement was too uncertain to be legally unenforceable. 

    The court decided the clause was certain enough to be enforceable. It said courts were quite capable of judging whether there had been discussions, and whether they were 'friendly'. It said the duty to have friendly discussions was the same as a duty to negotiate in good faith.  

    Other legal decisions had already ruled a duty to negotiate in good faith could be enforceable in some circumstances - although those decisions also said the duty of good faith did not stop the parties taking their wider commercial interests into account when negotiating. 

    The court drew a distinction between this clause and those in other cases requiring the parties to mediate, but without specifying who should be mediator. In those cases a vital component was missing, creating uncertainty. In this case it said: 

    "The agreement is not incomplete; no term is missing. Nor is it uncertain; an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute.

    The court looked at the parties' conduct to see if there had been sufficient friendly discussions. In fact, it decided there had been, so the first party was entitled to go to arbitration. 

    One consequence of this decision is that a court may not be able to decide whether there have been friendly (good faith) discussions without hearing what was said in 'without prejudice' discussions (discussions that would not normally be admissible as evidence). 

    Operative date

    • Now

    Recommendation

    • Parties wishing to include a contractual requirement for 'friendly discussions', 'negotiations in good faith' or similar provisions should take professional advice to make sure they are sufficiently certain to be legally enforceable.

    Case ref: Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd [2014] EWHC 2104

     

    Case law: Employer has to pay higher compensation for lost pension rights

    An employer had to pay much more compensation for lost pension rights than it anticipated after losing an unfair dismissal and discrimination claim brought by an employee who could otherwise have expected to remain employed until retirement. 

    A disabled employee won constructive unfair dismissal and disability discrimination claims after her employer failed to make reasonable adjustments for her. The Employment Tribunal decided she would have been employed indefinitely had the adjustments been made. The issue was how to value lost pension rights under her final salary pension scheme for the purposes of calculating her compensation. 

    Tribunals usually value these either on the simplified basis or the substantial loss basis. The simplified basis looks at the employer's contributions the employee would lose in the period between losing her job and when the court estimated the employee would get another job with similar benefits. On this basis, the employer calculated the employee should receive almost £33k, on the assumption she would find another job with similar benefits within four years. 

    The substantial loss approach is based on the capitalised value of pension rights which would have accrued when the employee retired had she remained employed. The employee's actuaries calculated the loss on this basis at over £97k. 

    The Court of Appeal found the substantial loss approach was appropriate because she had been employed for 15 years and would have remained in the final salary pension scheme until she retired, but for her employer's failure to make reasonable adjustments. 

    Her age and the likelihood of getting a job that would eventually leave her earning the same as if she had stayed in her old job were irrelevant. The issue was the extent to which her pension rights had suffered. 

    Operative date

    • Now

    Recommendation

    • Employers should check whether they need to compensate employees for lost pension rights on the simplified or substantial loss basis in employee disputes where there is a risk of unfair dismissal and discrimination claims.

    Case ref: Griffin v Plymouth Hospital NHS Trust [2014] EWCA Civ 1240

     

    Case law: Assignment of employee to client work must be conscious act of organisation for TUPE to apply

     An employee whose work is mostly for one client has not necessarily been assigned to the 'organised grouping' of employees protected by the TUPE rules if that client's work is transferred to a new supplier, the Employment Appeal Tribunal has ruled. 

    A project manager employed by a supplier worked on two telecommunication projects for the same client under two separate contracts between the supplier and the client. One contract was transferred to a new supplier. 

    The TUPE rules are designed to protect employees in certain circumstances – by preserving their jobs and terms and conditions of employment - when a business or undertaking they work for is transferred from their current employer to a new one. 

    For TUPE to apply, there must be an 'organised grouping of employees' which 'has as its principal purpose the carrying out of the activities concerned on behalf of the client'. In those circumstances, the employment contracts of the employees assigned to the organised grouping of employees must be taken over by the transferee business. 

    The new supplier in this case acknowledged that TUPE applied, but said the project manager was not assigned to the organised grouping of employees carrying out the work being transferred – rather he was an unassigned trouble-shooter. It did not therefore have to take him on as an employee under TUPE. 

    The Employment Tribunal found the manager had spent 67% of his time on the work now transferred to the new supplier, and ruled he was assigned to the organised grouping and therefore protected by TUPE. 

    However, the Employment Appeal Tribunal (EAT) found that the assignment of an employee to a grouping had to be a conscious act of organisation. The mere fact an employee spent most of his time on work for a particular client did not by itself mean he was a member of an organised grouping assigned to that work. Conversely, the fact he spent only a minority of his time on that work did not by itself mean he had not been assigned to the relevant grouping of employees. 

    The EAT remitted the matter to a fresh Tribunal to reconsider whether there had been a conscious act assigning the employee as part of the organised grouping of employees carrying out activities for that client. 

    Operative date

    • Now 

    Recommendation

    • Businesses taking over client work from a previous supplier should consider whether employees of the previous supplier carrying out that work for the client were doing so as the result of a conscious act of organisation, whether or not it comprised the majority of their work, when deciding which employees they are obliged to take on under TUPE rules.

    Case ref: Costain Ltd v Armitage [2014] UKEAT 0048_14_0207

     

    Case law: Patent not infringed because invention not properly described in patent registration 

    A business whose invention is protected by a patent should make sure the description in its patent registration is accurate and comprehensive, or risk being unable to stop others from making, using or selling similar inventions. 

    It's vital to describe your invention accurately and fully when applying for a patent. Someone will only be infringing your patent if the product or process falls within the description of your invention in your patent registration. 

    In a case in the United States, the inventor of a silicone bra insert alleged that another business – a former distributor - had infringed the patent on her invention by manufacturing and selling a similar bra insert. The other business argued its product did not infringe the patent as described in her patent registration. The inventor is now suing the attorney who registered the patent for her, on grounds that the description of her invention contained inaccurate measurements. 

    A complication is that even if she reissues her patent application, the law says the original invention is unprotected. Third parties can therefore make, use or sell products that would have infringed her patent had her invention been described accurately – and continue to sell those items made before the new patent is registered. 

    The same issues could arise in relation to UK and European Community patents. 

    Operative date

    • Now

    Recommendation

    • Inventors and patent owners should make sure their patents accurately and fully describe the aspects of the inventions they wish to protect, and that diagrams are accurate. Otherwise, they risk infringers claiming their products or processes do not infringe the patent as registered. 

    Case ref: Runberg Inc. d/b/a Zephyrs v McDermott Will & Emery LLP et al., index number 652543/2014, in the Supreme Court of the State of New York, County of New York.

     

    Case law: Variation of contract makes liquidated damages clause void 

    Parties to a contract containing a liquidated damages clause should make sure that if the contract is varied in a way that affects its value, the liquidated damages clause is reviewed to make sure the specified amount is still a genuine pre-estimate of potential loss if the contract is breached, or risk the clause being ruled void. 

    Two companies entered into a contract to collaborate on a tender. One promised to appoint the other as its sub-contractor if it won the tender. The contact contained a 'liquidated damages' clause stating a fixed sum of $40m to be paid to the sub-contractor if the main contractor defaulted on the contract. 

    A liquidated damages clause provides for payment of a fixed sum in the event of breach of a contract, to avoid protracted and expensive disputes about the amount of compensation payable. However, liquidated damage clauses are only valid if the fixed sum is a genuine pre-estimate of the financial loss the other party will suffer following the breach, and not a penalty for non-performance. To make sure there was no doubt that they agreed the fixed sum was a genuine pre-estimate of loss, the contract expressly stated: 

    "After careful consideration by the Parties, the Parties agree such amount is proportionate in all respects and is a genuine pre-estimate of the loss that [U] would incur as a result of [L]'s failure to honour the terms of the [contract]."  

    However, the parties later agreed to vary the contract. As a result, its potential value to the sub-contractor reduced significantly – from US$75m to US$S55m. However, the liquidated damages clause was not varied. 

    When the contractor later defaulted on the contract, the sub-contractor claimed $40m under the clause. The contractor argued that the fixed sum had ceased to represent a genuine pre-estimate of loss at the time the contract was varied. It was therefore unenforceable. 

    It is hard to convince a court that a liquidated damages clause – especially one agreed between two large organisations with access to excellent legal advice – is a penalty rather than a genuine pre-estimate of loss. The fixed sum must be shown to be 'extravagant and unconscionable with a predominant function of deterrence". 

    However, while the High Court was prepared to accept $40m was a genuine pre-estimate of loss at the time the contract was made, it ruled that the variation of the contract meant $40m "could no longer be a genuine pre-estimate of likely loss by a very significant margin" and was "on any objective view, extravagant and unconscionable with a predominant function of deterrence without any other commercial justification for the clause." The clause was therefore void. 

    Operative date

    • Now

    Recommendation

    • Parties to a contract containing a liquidated damages clause should make sure that, if a variation is agreed affecting the value of the contract, the liquidated damages clause is also reviewed to ensure the sum is still a genuine pre-estimate of loss.

    Case ref: Unaoil Ltd v Leighton Offshore Pte Ltd [2014] EWHC 2965

     

    Case law: Shareholder subject to confidentiality clauses could not disclose company information even if recipient signed confidentiality agreement 

    A shareholder that agreed not to disclose information about the company breached that agreement when it revealed company information to a potential buyer of its shares, despite the fact it made the buyer sign a confidentiality agreement, the High Court has ruled. 

    A company became a corporate shareholder of another company by buying 44% of its shares. It held some of those shares on behalf of two brothers who were also directors of the other company, and who therefore had access to its information, including internal accounts. The remainder of the shares in the other company were held by its three founders.

     The corporate shareholder entered into a shareholders' agreement with the other shareholders, under which it was obliged to keep company information secret except: 

    • when authorised to disclose it by the board;
    • when disclosure was required to vest the benefit of the shareholders' agreement in any other party to the agreement;
    • when required by relevant law or regulation;
    • when it was necessary to disclose information to its professional advisers.

    The corporate shareholder later instructed a professional adviser to find a buyer for its shares. The brothers gave the adviser information about the company and the adviser used it to market the shares. 

    A buyer was found and the corporate shareholder and the brothers disclosed further information – but they required the buyer to enter into an agreement to keep the information confidential.

    The company argued that the disclosures by the corporate shareholder and the brothers breached the agreement. It said the consequence of the breach was that it gave the market (including clients, potential clients and competitors) the impression that all the company's shares were for sale, that the founder members of the company were leaving and that the company was therefore in financial difficulty. It said this impression impacted on the company's business, turnover and profits – and claimed more than £4m compensation. 

    The corporate shareholder and the brothers argued they were entitled to disclose company information for the purposes of selling their shares in it. They said the obligation in the agreement to 'keep information confidential' could not completely restrict disclosure of company information, and the circumstances in which disclosure was permitted by the agreement were not intended to be exhaustive. If they were, this would mean the corporate shareholder could never sell its shares unless the founders consented. 

    Instead, the corporate shareholder and the brothers argued that despite the agreement, company information could be disclosed to a potential buyer of the company's shares - provided the buyer was made subject to a legally binding obligation to keep it confidential. 

    The High Court disagreed, and ruled the ordinary and natural meaning of the words in the agreement was that company information should not be disclosed to a third party, except in the circumstances allowed by the agreement. This applied both to information the corporate shareholder had obtained as a shareholder, and information obtained by the brothers in their roles as directors. 

    The court differentiated between initial information provided to potential buyers (which did not reveal the identity of the company), which the corporate shareholder and the brothers were entitled to disclose, and information containing specifics about the company, which in this case gave the impression all the company shares were potentially for sale - disclosure of which was a breach of the agreement. The corporate shareholder and the brothers had therefore breached the agreement when they did the latter. 

    However, the court found that the company had failed to show a link between the reduction in its business, turnover and profit, and the disclosure of company information by the corporate shareholder and the brothers. Therefore, the court awarded nominal damages of just £1. 

    Operative date

    • Now

    Recommendations

    • Parties negotiating agreements relating to company shares should make sure they have thought through their respective rights and obligations in the event a shareholder wants to dispose of its shares.
    • Parties subject to contractual restrictions on disclosing company information must comply with the ordinary meaning of the wording in those restrictions.
    • There is no implied right to disclose information in order to effect a sale of shares, even if the seller requires the buyer to keep the information confidential.
    • However, those claiming compensation for alleged breach of such restrictions must make sure they can show a causal link between the breach and the losses they are claiming compensation for.

    Case ref: Richmond Pharmacology Ltd v Chester Overseas Ltd & Ors [2014] EWHC 2692

     

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