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In a development which may have connotations for firms in the retail motor industry, regulations were brought into force on 1st October 2011 which provide agency workers with increased employment rights.

The objective of the Agency Workers Regulations 2010 is to give agency workers the entitlement to the same basic employment and working conditions as a company’s permanent employees.

Who do the regulations apply to?

The Regulations apply to agency workers who are assigned to do temporary work for a company through temporary work agencies, they do not apply to recruitment consultancies that place individuals into permanent roles.

What rights apply from day one of an assignment?

1. Access to collective facilities

From 1 October 2011, all agency workers have had the right to be treated no less favourably than comparable permanent employees or workers in relation to ‘collective facilities and amenities’, unless the less favourable treatment can be objectively justified.

Collective facilities could include:

• Canteen or other similar facilities
• Childcare facilities
• Transport services
• Toilet or shower facilities
• Staff common room
• Food and drinks machines
• Car parking

The concept of collective facilities does not extend to any off site facilities or benefits in kind which are not provided by the company, such as subsidised access to an off site gym.

The right is to equal, not better, treatment. Agency workers should not therefore be given enhanced access rights when compared with permanent employees. For example, if there is a waiting list for access to childcare facilities an agency worker will be entitled to join the list but not to jump the queue.

2. Access to employment vacancies

From the start of their assignment, agency workers have the right to be told of any permanent vacancies of the company in order to be given the same opportunity as a comparable permanent employee to apply.

The company can inform the agency worker ‘by a general announcement in a suitable place in the hirer’s establishment’. A suitable place may be a notice board or on the company’s intranet. They must be informed as to where to find the information, which could be explained during a worker’s induction.

This provision does not curtail an employer’s freedom as to how to treat applications for jobs. Agency workers do not need to be given preferential treatment when compared with other internal candidates or external candidates when deciding who is the best person for the role.

Which rights apply after a qualifying period?

1. The right to equal treatment regarding terms and conditions

The right to equal treatment with regard to basic working and employment conditions does not apply until the agency worker has completed a qualifying period of 12 weeks.

Provided that an agency worker has worked in the same role, whether on one or more assignments, with the same company for 12 continuous weeks, they will be entitled to receive the same basic working and employment conditions as are ordinarily offered to permanent employees in relation to:

1. pay;
2. duration of working time;
3. night work;
4. rest periods;
5. rest breaks; and
6. annual leave.

If there is a break of over 6 weeks between assignments, continuity will be broken and the agency worker will have to start counting the 12 weeks again before they are entitled to the right to equal treatment regarding terms and conditions.

Specific provision is also made in the regulations in relation to pregnant and nursing mothers who must be provided with paid time off for antenatal appointments, to be paid by the temporary work agency.

Anti-avoidance provisions

The Regulations contain specific anti-avoidance provisions to prevent temporary work agencies and hirers from structuring assignments to prevent the worker from acquiring equal rights.

A prohibited structure of assignments can occur when an agency worker has:

• completed two or more assignments with the hirer; or
• completed at least one assignment with the hirer and one or more earlier assignments with hirers connected to their current hirer; or
• worked in more than two roles during an assignment with the same hirer and on at least two occasions has worked in a role that was not the ‘same role’ as the previous role.

The anti avoidance provisions will then kick in if the most likely explanation for the above scenario is that the hirer or temporary work agency intended to prevent the agency worker from being entitled to the right to equal treatment.

To decide whether there has been such a structure of assignments, the following factors will be taken into account by the Tribunal:

• Length of the assignments;
• Number of assignments with the hirer or any connected hirer;
• Number of times the agency worker has worked in a new role with the hirer; and
• The period of any break between assignments with the hirer or any connected hirer.

Tribunals can make an additional award of compensation of up to £5,000 where a hirer and/or agency are found to have breached the anti avoidance provisions.

Derogations from the equal treatment principle
(Swedish derogation agreement)

In limited circumstances a contract may be entered into between an agency and an agency worker where it is agreed that the right to equal treatment with regards to pay (only) will not apply.

However, this regulation only applies where:

• the agency worker has a permanent contract of employment with the agency; and
• the contract was entered into before the first assignment started; and
• in periods between assignments the agency pays the worker a minimum of 50% of their basic pay while on assignment, and this must not be less than the national minimum wage.

It is unusual for an agency worker to be permanently employed by an agency and to receive pay between assignments, and this is therefore likely to be rarely used.

Compensation

The compensation payable by an agency or hirer for breach of the Agency Workers Regulations 2010 is that which is ‘just and equitable’ having regard to the extent of their responsibility. The legislation states that the minimum amount awarded must be two weeks’ pay but there is no statutory cap on the maximum amount that can be awarded.

Complying with the regulations

Now that the Agency Workers Regulations are in force it will be important to consider, as soon as possible, the measures you will take to comply with, or avoid the Regulations.

You may wish to put in place a record keeping system to ensure that agency workers do not work beyond the 12 week qualifying period, for example.

It will also be important to keep in regular contact with any agencies that you use for the provision of temporary workers and ensure they are kept aware of your current standard terms and conditions.

For further information on this article, please contact Pitmans Employment Team.

It is looking increasingly likely that 2012 will be another difficult year for the automotive sector, leading to a decline, not only in vehicle sales, but also in goods and services supplied to the sector. As a result, businesses may experience cash flow problems and increased creditor pressure to pay invoices.

There are a number of ways in which a business may look to ring fence its existing unsecured debt. If the underlying business is sound, a company struggling to pay its creditors may propose a composition of its debts via a Company Voluntary Arrangement (“CVA”). A CVA is a legally binding agreement between a company and all of its unsecured creditors to pay off historic debt over a period of time, usually 3 to 5 years. Any CVA must offer a greater potential dividend return to creditors than would be achieved if the company were to enter into insolvent liquidation.

Once the CVA is approved by the requisite majority of creditors it becomes a contract between the company and its creditors and binds all unsecured creditors. However, the rights of secured or preferential creditors cannot be adversely affected without their express consent.

One of the fundamental issues with CVAs is that, for the majority of companies, there is no statutory moratorium to prevent creditor/s taking action to recover sums owed to them whilst the CVA is put to creditors. However, “small companies” can obtain the benefit of a statutory moratorium designed to prevent creditors taking action against the company whilst the CVA proposal is put to the creditors. A “small company” is defined as one whose turnover does not exceed £5.6 million; its balance sheet total does not exceed £2.8 million and has no more than 50 employees.

For companies that do not fall within the “small company” criteria it is possible to enter into a formal insolvency process, known as administration, with the intention of exiting it via a CVA once the CVA has been approved. The primary purpose of any administration is to try and rescue the company as a going concern. Administration allows time for a company’s affairs to be re-organised under the protective umbrella of a statutory moratorium.

If it is not possible to rescue the company as a going concern then the business/assets of the company may be sold to a third party via a “pre-pack.” A pre-pack involves the company entering into administration and immediately selling its business and/or assets to a third party under a sale the terms of which were negotiated before the administrators were appointed. It allows the business to continue trading via a new company and secures the employment (employees will transfer to the buyer) whilst leaving behind the burden of historic debt with the company in administration.

Pre-packs are frequently used where the core business is still viable, but the company carries significant historic debt that it can no longer service. Invariably there is no funding available for the business to continue to be traded by the administrators and, for whatever reason, any CVA proposals are not appropriate or have been rejected by a majority of the creditors.

If you have concerns or queries about any of the issues dealt with in this article or wish to explore confidentially the various methods of restructuring and/or refinancing your business please contact us and we will be happy to provide you with advice and assistance.

Adrian Wilmot
Director
T: 0118 957 0595
E: awilmot@pitmans.com

Suzanne Brooker
Partner
T: 0118 957 0516
E: sbrooker@pitmans.com

Introduction

The new Bribery Act, passed by parliament in 2010, was due to be implemented in April 2011.  However, at the end of January, a government spokesman said that the act would not come into force until three months after guidance to the act had been made available, which will be published “in due course”.

The Act is intended as a wholesale reform of the old bribery laws which were a complicated and confusing combination of statutory and common law offences from more than 100 years development of law in this area. The need for reform was widely acknowledged, however, the final result may have alarming consequences for corporate entities operating in the UK as many law abiding businesses could inadvertently break the new law if they are not careful.

Offences Under the Act

The Act re-classifies the basic bribery offences of bribing another person and receiving a bribe whilst also introducing two new offences. The first of these is in respect of bribery of a foreign public official. Additionally the Act also creates an offence for corporate entities of failing to prevent bribery occurring within their organisation. The only defence to this is if the corporate entity has put in place “adequate procedures” designed to stop incidences of corruption. This offence applies to any corporate entity that carries on its business, or even part of its business, within the U.K.

The penalties can be extremely severe.  Individuals could face a maximum penalty of ten years imprisonment and/or an unlimited fine if found guilty. Corporate entities may face an unlimited fine in respect of an offence under the Act.

Facilitation Payments and Corporate Hospitality

A facilitation payment is usually a payment to a government official to speed up a routine bureaucratic action. These are illegal under the Act. However the decision to prosecute will be at the prosecutor’s discretion and he/she will consider various factors including whether it is in the public interest to prosecute.

Most concerning however is that prosecutorial discretion will also have to be relied on in respect of corporate hospitality, which may fall foul of the Act. It has at present been stated that “routine and inexpensive hospitality” will be permitted however “lavish or extraordinary hospitality” will not. What remains unclear is where this distinction will be drawn. Will a box of chocolates and a bottle of wine be acceptable? Will tickets to a football match? The result is that corporate entities in the UK find themselves in the awkward position of having to guess what level of advantage provided by way of corporate hospitality is reasonable and what may result in prosecution.

Conclusion

In light of the Act, the need is now more urgent than ever for corporate entities to either commit to implementing systems to counter bribery or review their current anti- bribery procedures to ensure they will be effective in preventing bribery being committed on their behalf and to be able to rely on the “adequate procedures” defence in appropriate circumstances.

All corporate entities may wish to put in place staff training programmes and ensure they have written procedures that are readily available. It may additionally be worthwhile to incorporate such policies into employment contracts and allow the employer to terminate employment in the case of breach.

With such severe penalties under the Act, it has become crucial that the action that is taken does not merely have the effect of prohibiting bribery but that it actively seeks to prevent it where it might arise. For some businesses this will involve nothing more radical than an assessment of their existing policies however for others it could mean a complete overhaul.

If you would like further information on the Bribery Act 2010 from Pitmans please visit the Pitmans Corporate website, or contact our team direct.

Adam Dowdney
adowdney@pitmans.com
+44 (0) 118 957 0574

Due to the diversity of companies and industrial groups in the automotive sector, experiences of the recession have varied widely.  While some companies have succumbed to the tough conditions, the headline-grabbing bailout of General Motors by the US government being the archetype, others have identified opportunities – and capitalised on them.  In spite of the unpredictable nature of this particularly dynamic industry, a clear trend has emerged in recent years towards companies of all types forming joint ventures to spread the risk of new commercial strategies in these uncertain times.  Setting up a traditional joint venture (‘JV’), where a new entity is incorporated and the collaborating parties are stakeholders in the new entity, offers clear commercial advantages – namely, it creates formal legal relationships between the parties, affords certainty and isolates risk.  However, alternative JV structures are available to businesses that offer varying degrees of integration between the parties and an assortment of tax advantages.  This article explores the market conditions that are prompting companies to join forces and the legal considerations to bear in mind when embarking on a new JV.

New Technologies:

The increasing consumer appetite and regulatory requirements for vehicles that produce a smaller carbon footprint has spurred the development of new fuel technology, lighter materials and fuel efficiency solutions.  Increasingly, companies are collaborating with their suppliers and competitors to achieve efficiencies that allow them to bring innovative technologies to the market at the lowest possible cost.  For instance, Bosch, DEUTZ, an engine manufacturer, and Eberspächer, an exhaust system and component supplier, have together set up a JV for diesel exhaust after-treatment, which was approved by the European Commission (Diesel Exhaust System Joint Venture) in April.

Emission control and fuel economy requirements vary dramatically from jurisdiction to jurisdiction, and, while progress towards harmonising those requirements to a universal international standard is slow, car manufacturers have to struggle with the complexities – and constantly update their product portfolios in an effort to keep up.  Likewise, the broader regulatory landscape, for example the high tax imposed on fuel in Europe which, in turn, creates consumer demand for cars with smaller or diesel engines, exerts a meaningful influence on product specifications.  In order to diversify their product portfolios, companies are investing in strategic growth areas, and spreading the risk inherent in all investment, by pairing up with other companies pursuing similar goals.  The creation of JVs to deal with increased manufacturing costs, and to remain competitive in an increasing stringent global regulatory regime, is a commonly deployed tactic.

Car manufacturers are also gaining competitive advantage by teaming up with other businesses in foreign jurisdictions to capitalise on the government incentives available in those countries to produce cleaner technologies.  A prime example is the funding (Government Incentive Schemes) put up last year by the US government, to the tune of $2.4 billion, for new ventures concerning automotive batteries and electric vehicles.

Opportunism in the Recession:

Some car manufacturers are seizing on the chance to grow their business and expand into new markets by capitalising on those distressed companies keen to shed their assets.  While the most aggressive strategy to achieve this aim – acquiring distressed businesses that already occupy the target market niche – may also seem the most obvious, many companies both at home and abroad are instead seeking to strike joint venture deals with incumbent firms to avoid fuelling trade tensions.

The joint venture between Potenza Sports Cars (owner of Westfield Sportscars) and the Malaysian firm DRB-HICOM (which manufactures and distributes cars under well-known marques such as Audi, Mercedes Benz, Honda, Suzuki, Mitsubishi, Isuzu and Mahindra) is a recent example.  The JV intends to produce and distribute a new eco-friendly and affordable sports car in Malaysia and across South East Asia with production starting in 2012 (see Malaysian Joint Venture).

In addition, the JV will export complete-knock-down kits and components manufactured in Malaysia to Potenza for the assembly at its UK plant for the European market.

The Legal Considerations:

Creating a joint venture that will focus on a specific goal, such as the development of a new technological solution, product specification or to infiltrate a foreign market, enables businesses to generate opportunities, pool resources and share risks.  The key decision for the participating businesses to make is whether the new enterprise will be incorporated – in other words, whether the participants will establish and co-own a new company that is a separate legal entity distinct from its ‘parents’ – in order to carry on the business of the new venture.

The legal form the joint venture should take rest on factors as diverse as the size of the new enterprise, the location of the participants, their commercial and financial objectives, as well as tax and competition law considerations. While an incorporated structure is a tried and tested method that, in many jurisdictions, is underpinned by an established body of legal principles, it is a relatively permanent and formal structure that might not fit in with the participant’s profiles and objectives.  In an increasingly globalised industry where cross-border joint ventures are becoming common, the differences in legal systems between countries (such as common law jurisdictions like the UK civil law jurisdictions like France) can also prove problematic if not given due consideration at this stage.

Broadly speaking, the basic choices fall into two categories:

• Incorporated entities, such as limited liability companies and limited liability partnerships; and
• Unincorporated organisations, such as legal partnerships and consortiums.

Incorporated structures are advantageous because they allow the JV to own and deal in assets, bring actions and contract in its own right.  Most significantly, the liability of the participants for the losses and liabilities of the joint venture is generally limited to the amount unpaid on the shares they hold.  However, due to the JV’s status as a separate entity, there may be unwelcome implications for the participants in terms of their financial and accounting arrangements, and potential for a large corporation tax bill in respect of transactions between the participants and the JV.  Due to the disclosure obligations for companies registered in highly regulated jurisdictions, such as the UK, the activities of the JV will be subject to a level of public scrutiny that may be avoided if a more informal structure is used.  Further, like the Bosch, DEUTZ and Eberspächer JV mentioned above, the new enterprise may fall foul of local or European competition rules and require clearance from the domestic competition authority, and/or the European Commission.   

Legal partnerships are less commonly used as a structure for business ventures because they do not offer the practical advantages of limited liability partnerships or companies.  Further, because each partner is deemed at law to be an agent of all other members of the partnership, each partner is jointly liable for the actions of the others.  However, it may make sense to consider a partnership structure in situations where the participants wish to have a direct interest in the assets used and contracts formed in the business of the JV, or to achieve specific tax advantages.

More common, however, are simple co-operation agreements between participants. These have the effect of putting the participants’ relationships with one another on a legal (specifically contractual) basis without the degree of integration mandated by an incorporated JV.  There will be no direct tax implications for the participants, and corporation tax will simply be payable on the profit accruing to each participant directly. Unlike a partnership, the participants in a consortium formed by a co-operation agreement will not share the liabilities and obligations of the others, except to the extent provided for by the agreement.  Normally, an express declaration denying any intention to create a partnership is included in the agreement as evidence to counter any subsequent inference that a partnership actually subsists (and that the participants should therefore share liability).

Conclusion:

While the conditions that make collaborating with suppliers and competitors an appealing option for players in the industry pervade, no doubt new joint ventures will continue to proliferate.  The close interaction of suppliers and lead firms has been an important catalyst for the expansion of the industry, and especially in developing countries.  This interaction has evidently created opportunities for relative newcomers to the automotive sector to move up the value chain and allowed incumbents to expand into new markets and to expand their product offerings at decreased cost and risk.  In all cases, it is necessary to take the parties’ objectives into account when deciding how best to structure the JV.  Although a JV may not live or die by the legal form in which it is structured, those decisions may nevertheless severely impact the JV’s profit margin and operational functions, or have unintended consequences of the participants, if not considered wisely first.

For further information relating to Automotive services, please visit the Pitmans Automotive website or contact our team direct.

Carolyn Butler
cbutler@pitmans.com
+44 (0) 118 957 0234

Rishi Sharma
rsharma@pitmans.com
+44 (0) 118 957 0271

In F1, Force India experienced a sinking feeling when its Chief Technology Officer, Mike Gascoyne, left to take up the same role at Lotus.  Force India issued UK civil proceedings against Gascoyne and others in June 2010 for “a very serious breach of intellectual property”.  In response, Gascoyne has stated:

“Obviously our wind-tunnel model was designed for us by Fondtech in Italy…It is based around a 2010 chassis, because there is a big fuel volume in it, it has a Cosworth engine, an Xtrac gearbox, our suspension, and other stuff designed by us.  The Fondmetal guys put some generic bodywork on….…Whereas you cannot copy anything or take anyone else’s IP you can use your expertise and you will base that on what you know and what directions you know have been happening.  That is what has happened.”

In the automotive industry where employees are likely to switch to a competitor, employers need to know what information ex-employees are allowed to take and how they can limit the potential damage to their business.

Identifying Different Types of Information:

There are four types of information used in a business.  These are (1) trade secrets, (2) other confidential information which is of such a high degree of confidentiality that it amounts to a trade secret, (3) employee’s skill and knowledge and (4) information in the public domain.

Information can be classified as a trade secret if it allows a business to obtain an economic advantage over its competitors and it is not in the public domain.  Examples of trade secrets can include secret processes of manufacture such as formulae, designs, special methods of construction, manufacturing processes, business plans and methods, financial or statistical information, customer lists and databases, computer source code, plans and technical drawings.

For public policy reasons, an employee is allowed to use all his acquired skill and knowledge no matter where he acquired it from and whether or not it was secret.  It is seldom an easy question to resolve what is and what is not an employee’s skill and knowledge.  The more complex the information, the more likely that it has not become part of an employee’s existing knowledge and skill. 

There has been a distinction between general background information and information deliberately memorised in order to be used elsewhere.  If evidence can be produced that the information had been deliberately memorised it will not come under the definition of an employee’s own skill and knowledge.

Breach of Post-Termination Restrictive Covenants and Breach of Confidentiality:

A claim for breach of confidentiality will usually be brought in addition to a claim for breach of restrictive covenants.

Trade secrets and other confidential information which is of such a high degree of confidentiality that it amounts to a trade secret can be protected by well drafted restrictive covenants in employment contracts and a claim for breach of confidential information.   Restrictive covenants protect trade connections and goodwill as well.  It is of the utmost importance that these are carefully drafted by an employment lawyer as they will be void and unenforceable if drafted too widely or for too long.

Information which forms part of an employee’s skill and knowledge and public domain information cannot be protected under these two actions.  The case of Faccenda Chicken v Fowler [1986] makes it clear that once an employee has left employment only trade secrets or similar highly confidential information is protectable.

Misuse of confidential information is the most difficult part of any breach of confidence action and this is one reason why pre-emptive strikes such as search and seizure orders, disclosure, delivery up and interim injunctions are commonly employed.  However, pre-emptive strikes are expensive and it is a commercial decision on the facts of each case as to whether they might be appropriate.

As the disclosure or continued misuse of confidential information can destroy the very thing a claimant is attempting to protect, the most practical remedy available to an employer is often to obtain a swift interim injunction that will last until the matter is dealt with by a court or resolved.

The scope of an interim injunction may be limited by time and place. It may restrict only certain activities and last only until the relevant information is no longer secret or until the conclusion of legal proceedings. However, if a claimant’s case is successful, they are also able to seek a permanent injunction to provide an ongoing prohibition on the misuse of the confidential information beyond the conclusion of the case.

Database Right Infringement:

As the above two actions give the ex-employer little protection, employers have started to use a new type of action to recover damage caused by leaked databases. 

The Database Directive (96/9/EC) introduced a database right which protects the compilation of information making up the database.  A database right will automatically exist where there has been a “substantial investment” in obtaining, verifying, or presenting the contents of the database.  At least one of the database makers must be from the EEA.

An employee is likely to infringe a database right if he takes customer lists with him when he leaves and subsequently uses the information for his own benefit (re-utilisation).  The fact that the employer does not have to prove that the contents of the database are confidential means that database right is a more straightforward and cheaper cause of action than breach of confidence.

In the case of Crowson Fabrics Ltd v Rider [2008] ex-employees copied and retained various documents belonging to their ex-employer including customer contact details and sales figures.  The high court held that the ex-employees had not acted in breach of confidence as the information was either in the public domain or within their gathered skills and expertise so that it was not confidential.  However, the ex-employees had infringed their ex-employer’s database rights by copying various customer sales figures and electronic files from its computer system.

Other Intellectual Property Right Claims:

The unauthorised use of patents, copyright, design right and trade mark rights will generally infringe the respective right.  This will potentially entitle the owner of the right to bring a claim seeking an injunction to prevent all further use and to recover compensation and costs.  In addition, rights may be lost as a result of leaks in confidential information.

Employers should review their contracts with consultants, employees, contractors and agents to ensure that the company owns all of the IP created by them under each agreement. Generally, in the absence of an appropriate agreement, IP created by a non-employee will not be owned by the company.

What Can A Business Do To Prevent A Leak of Confidential Information?

The nature of confidential information is such that misuse of it has the effect of destroying its value by compromising its confidentiality, so prevention is key.

Agreements:

A well drafted confidentiality agreement is particularly valuable in situations involving departing employees, customers and suppliers.  It is also worth ensuring that third parties such as suppliers and distributors have in place contracts expressly providing for some form of recourse if they disclose confidential information or trade secrets.

Employers should include effective clauses in employment contracts covering restrictive covenants, garden leave, confidentiality and ownership of Intellectual Property Rights.

Computer Security:

In the age where trade secrets and other confidential information of most businesses are held in digital form it is easy for employees who are leaving to join a competitor or set up a rival business to download vast quantities of data onto disks or memory sticks, and simply walk out the door. Or they may prefer to e-mail the information to a personal account and consider it at leisure in the comfort of their own home. 

Employers should try to use the computer systems to their advantage by planting seeds (fake entries) into databases and using a document management system to track records of when documents have been accessed, by whom and whether it has been copied.  Both of these will make tracking copying easier to evidence.

Keeping records considerably strengthens most claims as it is all based on evidence.  Recording evidence such as time and resources that go into creation of a database and of when and by whom copyright works are created will strengthen some of the above claims.  Forensic IT investigators can extract the relevant information however they come at a price and are usually part of the team once there is a good reason to believe that information has been taken.

Consider if your IT system can offer greater protection e.g. password access to documents or databases only.

Company Policies:

Employers should ensure that the company policy is up to date and deals with confidential information.  Make it clear what may be stored and who owns the information and emphasises that employees must keep their personal and business contacts separate.  In addition to this it may also be very worthwhile for organisations to provide training to staff and employees on the handling of confidential information and marking documents as confidential where this is the case.  In extreme cases it might be worthwhile considering setting up a management program in which the business’ key information, including trade secrets, are identified and then placed under in a highly secure location where only authorised personnel are able to access them.

Conclusion:

The digital world has led to an increase in the leak of confidential information.  The database right grants employers an exciting wider protection but ensuring you spend the time to put in place preventative measures is crucial.  If you are suspicious of a leak, an interim injunction may be able to stop full extent damage being done but you must contact your lawyer as soon as possible. 

In the busy automotive industry where time is precious, preventing a leak in confidential information will ensure that precious time is spent innovating new ways to out do competitors and not fighting a legal battle against an ex-employee.

Exactly what action Force India has brought against Mike Gascoyne is uncertain and it will be interesting to see if any further information is released in relation to this.  What is certain is that a vast amount of time will have been spent by employees at Force India in relation to various legal battles this year.  The costs of which will not be wholly recoverable.

For further information relating to Automotive services, please visit the Pitmans Automotive website or contact our team direct.

Holly Strube
hstrube@pitmans.com
+44 (0)118 957 0571

The general “rule of thumb” calculation for the compensation payable for the loss of the use of a car is £10 per day.  The loss of use of a bus or a coach however is very different from the loss of use of a car and has significantly more seats than a car and the loss suffered from such a vehicle being unavailable for use is therefore significantly greater.  How can the operator of the bus or coach company be compensated correctly?

With a taxi or private hire vehicle, it is generally accepted across the insurance industry that the cost of hiring a replacement is the compensation payable, so why should a bus or coach be any different?  Third parties will seek to deflect claims brought by companies with a fleet of vehicles by arguing that the fleet operator could utilise one of the other vehicles from their fleet and if they did so then the fleet owner would, in the their argument, have suffered no loss from the relevant vehicle not being available for use.

It is certainly true that fleet operators frequently have standby vehicles for emergencies or to cover vehicles when they are being serviced or maintained and it has been established in the 1970 case of Birmingham v Sowsbery that the provision of a standby vehicles is reasonable and necessary and that they are to be taken as being in operation at any one time.  Not to have the use of a vehicle (a valuable chattel) as a result of a negligent third party would deprive the operator during the period their vehicle is off the road, for which they should be compensated for, regardless of whether there were other fleet vehicles available.  The judge stated that “where the Plaintiffs in a case such as this have had to hire a replacement vehicle, or where they are a profit making concern and can prove a financial detriment from the temporary loss of their vehicle, no difficulty arises.  The precise figure can be claimed as special damage and will be recovered if proved”.

The case went on to set out two alternative methods for calculating such a loss of use.  The first method is to take the cost of maintaining and operating the vehicle as the basis for calculation, on the assumption that this figure must represent approximately the value to the operators when the concern is non-profit making.  The second method is based on interest and capital and depreciation.

In the case of Beechwood Birmingham Limited – v – Hoyer Group UK Limited (Court of Appeal) earlier this year a Claimant was awarded loss of use damages rather than hire charges due to the number of vehicles that they had available to them and could have utilised from their fleet.  The principles established in Birmingham v Sowsbery were accepted as valid methods of claiming loss of use today, which have reinforced the existence of formulas for both small and large operators.

For further information relating to Automotive services, please visit the Pitmans Automotive website or contact our team direct.

Jacqueline Forrester
jforrester@pitmans.com
+44 (0)118 957 0253

The start of 2010 has seen a rally in M&A activity levels which, while not quite back at pre-downturn levels, are now certainly looking far healthier than for the same period last year.  Even while the possibility of a “double dip” looms over the recovery, there has been a slow but sure upward trend in M&A activity, and an increasing number of deals are now progressing smoothly beyond the preliminary stages.

In part this upturn has been driven by increased activity in the private equity sector, which in turn has been driven by both the demands of investors looking for a return, and the business model of the funds themselves.  The Reading market has seen several interesting private equity backed deals complete so far this year.  However, on a more general level there are signs that confidence is returning to the marketplace, as can be seen from the recent spate of high profile IPOs being launched.  Notwithstanding the fact that some of these have been pulled, or had the issue price adjusted, the activity levels themselves are encouraging.

A significant part of the return in confidence is the emergence of greater certainty of funding.  The scarcity of funding required to effect the majority of M&A activity has played a crucial role in reducing M&A levels during the downturn.  While funding has not returned to where it was a couple of years ago, there is now more stability in expectations.  The downturn has also necessitated a change of mind set and ways of doing business that has taken time to set. Whereas a few years ago auction sales and contract races were common and symptomatic of the strong negotiating position of sellers in the market place, power has now shifted towards buyers, and this is reflected in the deal process.  Due to the uncertainty which still exists, buyers are increasingly seeking to negotiate deal protection by contractually agreeing to shift the risks associated with uncertainty onto the seller. There are several legal mechanics that buyers have begun to insist on in order to do this.

Early on in the negotiating process buyers are seeking exclusive rights to do a deal with the sellers, and even enhancing this right with a “break clause” which would provide that if the seller does not proceed, a payment will be made to the buyer (usually to cover the buyer’s costs and expenses). While locking sellers in to exclusivity periods, buyers are also seeking to protect their right to walk away from deals in the event of a material adverse change (“MAC” clauses). These essentially place change of business type risks back on the seller, and can be fiercely negotiated, but buyers are increasingly seeking to keep MACs broader and more far reaching.

Another feature of recent deals has been the increased use of the “locked box” by buyers as a mechanism for giving the buyer certainty. This allows the buyer to essentially “stop the clock” on a business and ensure that as of a particular date the balance sheet will not change. In addition to the certainty it give a buyer in relation to the financial position of the target (in theory at least) it also saves the deal costs of undertaking a completion accounts exercise, a saving that can be shared between the buyer and the seller. A feature closely connected with the locked box, but of more general application is a retention from the purchase price.

Prior to the downturn, due diligence, whether legal, commercial or financial was typically extensive, time consuming and costly. On the legal side, we are now seeing buyers trying to reduce the costs of the exercise and doing a more focussed, “exceptions” based due diligence. While the reduced costs of such an approach is clearly one of the driving factors, the shift in power has also been a key influence. If a buyer is now able to negotiate around the need for extensive due diligence by procuring a locked box (perhaps backed up by a retention), a MAC clause and a suitable buyer protection including a full set of warranties, then this can obviate the buyer’s own investigations. In fact, given recent case law in this area, it may be that a buyer who does its own investigations but does not do so sufficiently thoroughly or does not sift through information provided may actually put itself in a weaker position than had it not begun the diligence exercise. Effective, thorough due diligence remains important.

While from a buyer’s perspective the financial and regulatory uncertainty has driven the need for deal certainty, from a seller’s perspective such provisions are not easily acceptable.  The directors of a company will need to ensure that they are getting the best deal and that they have tested the market sufficiently – something that is particularly important when faced with a volatile market.  Since the introduction of the Companies Act 2006, directors have been ever more aware of the duties that they owe not only to shareholders, but also to other interested parties including creditors (which could of course include banks).  As a result, they will be reluctant to prematurely offer a buyer exclusivity until they have assessed the level of interest from all parties. Of course, during a downturn directors of distressed businesses may be driven by more pressing demands.

For further information relating to Corporate services, please visit the Pitmans Corporate website or contact our team direct.

Rishi Sharma
+44 (0) 118 957 0271
rsharma@pitmans.com

It is a sign of the times that lenders and other businesses extending credit are taking security wherever possible, and frequently that security is in the form of personal guarantees.  It is equally a sign of the times that more and more guarantors are being called on to honour their guarantees.  It comes as no surprise then that lawyers are looking at ways in which guarantors can try to escape liability when faced with a demand under their guarantee. The law relating to domestic arrangements and guarantees given by wives for their husbands’ businesses was hammered out in the downturns of the 1980s and 1990s in Barclays Bank –v- O’Brien and definitively resolved in the House of Lords in 2002 in RBS –v- Etridge.

Commercial sureties – directors giving personal guarantees for their own companies – are in a different position.  The general rule is that (as with any other contract) they are bound by the documents that they sign.  In general the creditor, usually a bank, does not owe a duty to explain the guarantees or to advise the commercial surety to seek independent legal advice.

Necessity being the mother of invention, are we now to see a wave of new and ingenious ways for guarantors to try to escape liability?  Maybe, maybe not.  In North Shore Ventures –v- Anstead Holdings Inc. and Others (2010) the High Court has considered on one such possible escape route: non-disclosure of risks to the guarantor.  The guarantors were unsuccessful but perhaps the door has been left ajar for future attempts.

In North Shore the lender was a company associated with the Russian oligarch Boris Berezovsky.  Anstead drew down funds under a loan agreement with North Shore and paid them into Swiss bank accounts whereupon they were frozen by the Swiss authorities because of North Shore’s association with Berezovsky, who was under investigation.

Anstead was able to use some of the funds, and made repayments to North Shore, but in 2008 North Shore brought proceedings against two guarantors based on a demand for some $35million.

The guarantors argued that the guarantee was void because North Shore had failed to disclose that Berezovsky was under investigation and that, therefore, there was a risk of the monies being frozen.  Of course, if asked, a creditor must not give a misleading answer to a question.  Other than that, however, the House of Lords had stated in Etridge that the only duty on a creditor was to disclose any unusual feature of the contract between the debtor and creditor (or between the creditor and other creditors) that might affect the rights of the guarantor.  The precise ambit of the disclosure obligation, however, was unclear.

In North Shore the High Court ruled that the guarantee was valid and would not be set aside on grounds of non-disclosure.  The Judge came to the following conclusions as to the law:

(i) The obligation of a creditor to make disclosure to a prospective guarantor need not, even in the case of a guarantee for a loan, be limited to features of the contract between the creditor and the principal debtor.  Where such an obligation arises, therefore, it can go beyond the features of the relevant contracts.

(ii) A creditor need not, on the other hand, disclose anything which the prospective guarantor could reasonably be expected to know.  The creditor is not to be taken to have made a representation in respect of a matter unless he could expect the guarantor not to know it.  Hence, for example, a loan creditor is not normally under an obligation to disclose matters bearing on the principal debtor’s credit-worthiness.

(iii) It is immaterial that a prospective surety could be expected to be ignorant of a particular matter if he could be expected to know of the risk in general terms.

(iv) While a creditor does not have to disclose every material risk, a risk must be material to be disclosable.  A creditor need not, therefore, disclose a matter unless it is capable of rendering the risk the guarantor is undertaking more onerous than the guarantor would otherwise expect.

(v) This leads to a final point which is that a guarantee can be avoided only if the non-disclosure was in fact significant to the guarantor.  A surety cannot therefore seek to avoid a guarantee for non-disclosure by the creditor unless disclosure of the relevant information would have made a difference to him.

The Swiss investigations into Berezovsky could therefore in principle have been disclosable.  However, no duty to disclose arises if the guarantors could reasonably have been expected to know of the risks in general terms, and the Judge concluded that the guarantors knew, and could reasonably have been expected to know, about the investigations into Berezovsky.  They could not therefore avoid the guarantee on grounds of non-disclosure.

The Court also ruled that certain “protective clauses” in the guarantee would have been effective to protect the bank against non-disclosures before the guarantee was entered.

Another attempt to circumvent a well-drafted guarantee thus ends in failure. The door remains open, however.  There is still scope to argue that a failure on the part of a lender to disclose a material risk could cause the guarantee to be set aside but plainly this is only going to arise if there are very unusual circumstances.  Commercial lenders will also take heart that they can avoid that consequence with well-drafted protective clauses.

For further information relating to Dispute Resolution services, please visit the Pitmans Dispute Resolution website or contact our team direct.

Tim Clark 
tclark@pitmans.com
+44 (0) 118 9570 264