The reasonable expectations of honest, sensible businessmen

The reasonable expectations of honest, sensible businessmen

One of the requirements for a valid and binding contract is for an offer by one party to be accepted by another.

In our previous blog, ‘Get it in writing!’ Not necessarily…’we looked at how the courts considered a contract with a specific provision in writing stating that it cannot be varied by an oral agreement and then held that it is in fact possible for the parties to vary such a contract with an oral agreement.

In the case of Reveille Independent LLC and Anotech International (UK Limited), the courts considered whether a contractual term requiring both parties to actually sign the contract in order for it to be legally binding can be waived.

Background

Party one sent a deal memo to Party two setting out the proposed terms. It contained a requirement for both parties to sign it. Party two altered, signed and returned the deal memo to Party one effectively making a counter offer. Party one did not sign the amended deal memo. Negotiations between Party one and Party two for a long form agreement broke down but Party one still performed all of its obligations as set out in the amended deal memo.

The case

Party two subsequently argued that there was no contract based on the amended deal memo because Party one did not accept the terms as it never signed it. The court disagreed.

The court held that it is already established law that a party to a contract can waive a prescribed form of acceptance if the other party accepts in some other way, provided the acceptance has not somehow prejudiced the other party. Party two argued that it had been prejudiced because Party one’s actions created uncertainty over whether a contract had been formed. The court did not agree and responded that the only uncertainty arising was the precise date on which the contract was formed. The fact that Party two was receiving all of the benefits of Party one’s performance of the terms of the amended deal memo meant Party two’s position had not been prejudiced.

The court also highlighted that the conduct of parties after the date on which the contract was made is relevant in confirming their beliefs that there is in fact a binding contract.

Reminder

The case is a reminder that a specific requirement as to how acceptance of an offer can be made (here, by countersigning the deal memo) can be waived. When investigating whether an offer has been accepted and a contract has come into existence, the principle applied by the courts will be ‘the reasonable expectations of honest sensible businessmen’.

This post was edited by Paul Simpson. For more information, email blogs@gateleyplc.com.

Are you telling the truth?

Are you telling the truth?
During the course of Court proceedings, a party will prepare a number of documents in support of its case, including a Claim Form and Particulars of Claim (if the party is the Claimant), a Defence (if the party is the Defendant), witness evidence and expert reports. These are examples of documents which, under the Court rules, should be verified by a Statement of Truth.

A Statement of Truth does exactly that: it is a clear statement that the person signing the document believes that the facts contained within it are true. The Court treats Statements of Truth very seriously: under the Court rules proceedings for contempt of Court may be brought against a person if he makes, or causes to be made, a false statement in a document verified by a Statement of Truth without an honest belief in its truth (CPR 32.14), the rationale being that a false Statement of Truth is viewed as an attempt to interfere with the course of justice. The penalties for contempt of Court include a fine and/or imprisonment (Contempt of Court Act 1981).

A recent Commercial Court case* provided some guidance as to how the Court will approach sentencing for contempt. In brief, this was the Claimant’s application for committal of the Second Defendant arising out of the First Defendant’s breach of an undertaking it gave during the course of the proceedings. The Second Defendant was the Chief Executive and President of the First Defendant and the First Defendant acted through him in these proceedings. In concluding that an immediate custodial sentence of 18 months “would reflect the gravity of the contempt”, the Court took into account the fact that the Second Defendant:

Committed the contempt deliberately and “for very substantial financial gain”;
Subverted “a consensual arrangement”;
Deliberately concealed his actions and “allowed the solicitors and Counsel to unintentionally mislead the Claimants and the Court”;
“Swore a false affidavit and signed a false Statement of Truth”; and
Failed to explain his actions or offer an apology.
Whilst the above case is an extreme example, in which the false Statement of Truth was but one of several factors the Court took into account in committing the Second Defendant for contempt, it does illustrate that if a party to legal proceedings lies to the Court, they do so at their peril.

*Todaysure Matthews Limited and another –v- Matthews International Corporation and another [2016] EWHC 584 (Comm).

For more information, email blogs@gateleyplc.com.

The ideal commercial lease

The ideal commercial lease

Have things changed since the financial crisis?

The saying goes that beauty is in the eye of the beholder and as much is true when it comes to commercial leases.

Whilst the notion of an ‘ideal commercial lease’ is a brilliant and awe-inspiring idea, sadly, such a thing does not exist. Tenants and landlord will be alert to the key terms likely to affect their on-going interests.

For tenants this often focuses on the practicalities of paying rent (monthly or quarterly), their ability to assign or underlet the property to a third party if business doesn’t work out as hoped and the on-going liability for service charges and insurance rent.

For their part, Landlords will do their upmost to secure a clean rental stream by minimising their obligations in terms of providing services and making sure rent review clauses are as favourable as possible.

Landlords will increasingly have to take into account the extensive ‘green’ leasing provisions which now prevail in the regulatory environment. Landlords will often want built into new leases obligations on both parties to co-operate in obtaining energy efficiency information about a property and taking steps to improve energy efficiency. Don’t be fooled by this outbreak of bonhomie between landlords and tenants though. Landlords will certainly want to make sure that the costs of upgrading the energy efficiency of their buildings are picked up by their tenants by way of service charge. Tenants will battle hard against this arguing that it is the landlord on whom the regulatory burden should fall.

The struggle between the competing interests of landlords and tenants has become increasingly intense since the financial crisis. Whilst the bottom of the market just after the recession certainly provided an opportunity for savvy tenants to renegotiate some of the more challenging clauses of their leases, the recent upturn in the market and the shortfall of high-end commercial property in popular areas has put the ball firmly back in the landlords’ court.

The Code for Leasing Business Premises 2007 was designed to provide a level playing field for tenants and landlords by setting down a set of institutionally acceptable terms on key lease clauses such as break and assignment/underletting conditions. The new Model Commercial Lease (commissioned by the British Property Federation) was another tool designed to reduce the number of areas of disagreement between tenants and landlords and reduce the time and cost of negotiating a lease.

However, use of the Business Code has been slow at best. It is non-binding and therefore bypassed by many landlords who continue to use their own standard documents as the basis for negotiation.

So what makes a good new lease? For tenants this increasingly boils down to a few key clauses (break conditions and key assignment/underletting pre-conditions to name a few). For landlords, locking in their tenants to secure a long term rental income is (and will always be) a key aim and a tenants ability to break or assign a lease can often lead to intensive negotiation.

So despite the efforts to introduce more standardised lease terms through the Code and Model Commercial Lease, for the moment it is still the case that all is fair in love and war (and lease negotiation).

This post was edited by Tim Swallow. For more information, email blogs@gateleyplc.com.

Don’t shoot the DD messenger

Don’t shoot the DD messenger

The documents are signed, you’ve done the deal – congratulations! But some time later things are not as rosy as they seemed: revenues are not what you expected and you’re beginning to question the wisdom of your investment decision. Looking round for someone to blame, the accountants who provided the due diligence reports seem a prime candidate.

Luxury health club deal

In late 2006 Ernst & Young were engaged to provide limited due diligence services on the acquisition of the Esporta group of premium health and fitness clubs. Esporta’s revenues were largely determined by membership so a key part of the accountants’ role was reviewing the forecasts for new member growth in the business plan provided by Esporta’s management. Esporta predicted that the number of new members joining its existing clubs would grow by 2.73% in 2007. Ernst & Young took a more conservative approach: their due diligence report revised this forecast down to 0.8%.

A done deal?

An unusual feature of this deal was that, by the time the accountants were engaged to provide the top up due diligence, the buyer had already signed a sale and purchase agreement agreeing to buy the Esporta clubs for £474 million. If the buyer decided to withdraw from the deal, either because it was unhappy with the contents of its due diligence report or for another reason, it would forfeit the £23 million deposit already paid to the seller.

In fact, the deal went ahead but when post-completion revenues were significantly lower than expected the buyer brought a negligence claim against Ernst & Young. The buyer argued that the accountants should have been even more conservative in their revised forecasts and that the predicted growth rate, based on information available at the time, should actually have been 0%. The buyer argued that “but for” the accountants’ negligence it would not have completed the transaction and would instead have withdrawn from the deal and forfeited the deposit.

The decision

The High Court has now dismissed the buyer’s claim. The court found that Ernst & Young had not been negligent at all: their analysis was “entirely reasonable and complete”. In case it was wrong on that point, however, the court also considered whether the alleged negligence by the accountants actually caused the buyer any loss. Here, the court said the alleged failures in the accountant’s reporting made no difference to the buyer’s decision to proceed with the deal: even if they had revised their forecast downwards, as the buyer said they should have done, the buyer would still have acquired Esporta on the agreed terms.

The judge also took a dim view of a late change in the buyer’s case where it emphasised that the accountants’ were aware of the key information several months earlier than previously thought. That was viewed as an “opportunistic and unprincipled attempt” by the buyer to rescue its case which had already been exposed as “lacking in merit”.

Hindsight is a wonderful thing…

Whenever something doesn’t turn out quite as expected, it is probably inevitable that decisions are reconsidered with the benefit of hindsight. The buyer clearly felt that had the forecasted growth been revised down it would not have gone ahead with the deal. But the judge considered the buyer’s decision to proceed only on the basis of the information available to it at the time that decision was made and found that the further £1 million reduction in EBITDA that would have resulted from the buyer’s calculations was immaterial in the context of the deal as a whole.

It also seems likely that the poor joining figures experienced immediately after completion could have been affected by Esporta featuring in the BBC’s “Watchdog” programme which alleged that sales staff had misled prospective members about the terms of membership and that the business had breached those terms by refusing to allow seriously ill members to terminate their membership. Something which presumably Ernst & Young (and the buyer) knew nothing about at the time of the deal.

This post was edited by Sophie Brookes. For more information, email blogs@gateleyplc.com.

Obtaining payment – an alternative route for contractors

Payless notices – Revisited!

Adjudication is not the only option for a Contractor seeking to recover monies owed by an Employer as shown in a recent High Court case[1].

The case saw a dispute arise between a Contractor and Employer who had entered into a JCT Design and Build Contract. As works progressed the Contractor issued a series of three interim applications for payment in October, November and December 2015 respectively. Following this the Employer did not serve any effective payment notices on time, neither did it serve any form of pay less notice. Subsequently it did not provide payment to the Contractor for the sums due under each of the original interim applications. As a result of the Employer’s failings the Contractor left the site in late 2015.

Smash and grab!

At this point one might have expected the Contractor to kick start the adjudication process, as the Act[2] entitles it to do.

On the face of it the Contractor could claim the amount applied for in the interim applications whether or not the Employer felt that a lesser amount should have been paid. This is due to the Employer’s failure to supply any of the notices mentioned above in response to the valid interim applications submitted by the Contractor, a classic “smash and grab” approach to adjudication.

However, the Contractor took an alternative approach.

Suspension, termination and winding-up

The Contractor’s first step was to suspend the works on site due to the Employer’s non-payment, the Act allowing it to claim reasonable costs for such suspension[3], which it would not have been able to do in an adjudication. In taking this approach to suspend the contract, costs to the Employer would have likely been higher (due to the delays on site), by comparison to the situation where the Contractor had commenced an adjudication, where the work on site would have likely continued

Due to this the Employer deemed it necessary to recruit an alternative contractor to complete the works. However, the Contractor took this action as a repudiatory (serious) breach of the Contract and validly terminated the contract.

The Contractor then took a final step and issued a winding-up petition against the Employer for the recovery of the outstanding figures due under each of the interim applications.

What should be taken away from this case?

Whilst this route may seem unconventional, the Judge saw no reason to prohibit the Contractor’s approach and dismissed the Employer’s application for an injunction to stop the winding-up petition.

The judgment reinforces the Court’s rigid approach to an Employer failing to serve a valid payment or pay less notice on time, resulting in the payment of the original figure detailed in a Contractor’s interim application becoming due.

Further, it seems that this principle is still relevant even when a Contractor does not take the more conventional route of adjudication to recover monies owed.

For more information, email blogs@gateleyplc.com.

[1] COD Hyde Ltd v Space Change Management Ltd [2016] EWHC 820 (Ch)

[2] Housing Grant Construction and Regeneration Act 1996

[3] Housing Grant Construction and Regeneration Act 1996, s.112.

Women in finance charter

Women in finance charter

What is it?

On 22 March 2016, Jayne-Anne Gadhia, (CEO of Virgin Money), published her review into the representation of women in senior managerial positions in financial services,”Empowering Productivity: harnessing the talents of women in financial services“. Nearly 3,500 people – men and women – contributed to the Report through a variety of channels. The Report and its recommendations focus on fairness, equality and inclusion for men and women in the financial services sector.

In response to the Gadhia report, HM Treasury has launched the ‘Women in Finance’ Charter asking financial services firms to commit to key industry actions.

How will it work?

The Women in Finance Charter asks financial services firms to commit to implement four key industry pledges:

Appoint a senior executive responsible for gender, diversity and inclusion
Set internal targets for gender diversity in senior management
Publish progress against these targets annually on their website
Aim to link the pay of senior executives to delivery against these targets.
Why is it important?

Analysis of data prior to the review highlighted that female advancement from middle to senior levels of management is worse in financial services than in any other industry in the UK. Indeed, more women than men start out in Financial Services but, as they progress, the majority fall out, particularly at middle management level. Whilst measurable improvements have been made in the diversity of Boards, statistics show that unfortunately this has not been reflected in senior and middle management positions. New Financial’s[1] sample of 200 firms active in UK Financial Services showed an average of 23% female representation on Boards, but only 14% on Executive Committees and only 50% of women, compared to 70% of men believe they have an equal opportunity to advance in the financial services sector regardless of their personal characteristics or circumstances.

How has the Charter been received?

The government strongly believes the recommendations of the Gadhia report will be key to driving change in the senior levels of the male-dominated financial services industry and there can be no doubt that achieving a balanced workforce at all levels in Financial Services will improve culture, productivity and profitability.

Virgin Money committed to sign the Charter on the first day, together with Lloyds Banking Group, Barclays, HSBC, Royal Bank of Scotland, Columbia Threadneedle and Capital Credit Union. It’s very positive to see so many of our key financial services providers get on-board, however, the success of the Charter may be difficult to assess as it remains unclear what the timeframe for conformity is.

Financial Services providers willing to sign up to the Charter will also face many challenges and may be required to make fundamental changes to their internal practices in trying to comply with the recommendations. Changes will have to be considered and potentially made to data gathering practices, recruitment, flexible working, unconscious bias training, bonus measures and promotion schemes.

The Treasury will publish a list of firms who have signed up to the Charter after three months and firms can sign the Charter and formally commit to implement these recommendations by visiting: http://www.womeninfinance.org.uk and completing the online form.

http://newfinancial.eu/

For more information, email blogs@gateleyplc.com.

Overdue reforms to ‘pension loss’ calculations

Overdue reforms to ‘pension loss’ calculations

Lost pension rights can be a key part of the compensation awarded by Employment Tribunals to successful ‘wrongful dismissal’ or ‘discrimination’ claimants. Guidelines used to assess the value of these lost pension rights, which were last updated in 2003, are now being consulted upon.

What are the guidelines for?

The guidelines were first published in 1991 to help to assess the loss of pensions rights linked to a claimant’s defined benefit and defined contribution benefits. Although the guidelines were not compulsory, if parties wished to use their own approach to asses such benefits, additional costs would need to be incurred to satisfy a requirement for expert actuarial advice.

So why change now?

Changes to funding and growing dissatisfaction with the guidelines meant change was inevitable.

The guidelines had incorporated actuarial assumptions developed by the Government Actuary’s Department (GAD) for calculation purposes. However, no further funding was made available for GAD to continue to be involved.

Comments from Underhill LJ, requesting the guidelines be updated,[1] further underlined the need for change. A working group was then convened by the Employment Tribunal Presidents responsible for tribunal procedures in England, Scotland and Wales to look at this issue. The consultation paper [2] is the result of this group’s deliberations.

So what changes are proposed?

Broadly, the old guidelines set out a ‘contributions method’ for defined contribution benefits and a ‘simplified’ and ‘substantial loss’ methodology applying to calculations for defined benefit cases.

The paper proposes that this methodology be replaced by the ‘simple cases’ approach which could cover both defined benefit and defined contribution cases and the ‘complex cases’ approach which would replace the ‘substantial loss’ methodology. However, the paper anticipates that the ‘complex case’ approach would only be used rarely.

Whilst the details of the approaches are beyond the scope of this blog, the material differences in the two approaches are such that the paper recommends a preliminary telephone hearing to identify the correct approach at an early stage.

A number of default assumptions will also be adopted by Employment Tribunals in agreeing the loss relating to successful claimants including retirement at state pension age, no loss to state pension and various automatic enrolment assumptions unless the claimants can persuade the Tribunals otherwise.

Comment

The updating of the guidance in this area is long overdue and is to be welcomed.

Pensions has developed considerably since 2003 with changes to pensions tax post ‘A-day’, automatic enrolment, state pension, contracting out, accessing pensions and changes in public sector schemes from Final Salary to Career Average.

It is hoped that the result of this consultation, which closes on 20 May 2016, will be a simpler, more efficient and more effective process for calculating pension loss.

This post was contributed by Suresh Bhatt. For more information, email blogs@gateleyplc.com.

[1] Compensation for Loss of Pension Rights in Employment Tribunals- a Consultation Paper

[2] Griffin v Plymouth Hospital NHS Trust [2014]