How should joint sellers share liability?

How should joint sellers share liability?
Posted on 02/03/2015

Hidden amongst an array of legal jargon, an acquisition agreement will usually contain two generic types of obligations for a seller:

active obligations, which require the seller to do something (for example, to sell shares) or to not do something (for example, not to compete with the business being sold); and
passive obligations, such as warranties and indemnities which don’t require the seller to do (or not do) anything immediately but which give the buyer a post-completion remedy if the warranty is breached or the indemnity is triggered.
Where there are multiple sellers, a key question is how those sellers should share liability under these obligations.

The choices

Liability for obligations entered into under an acquisition agreement may be:

joint and several;
joint; or
several.
(and ‘several’ here is just an old-fashioned word used by lawyers to mean separate).

So what does this actually mean for the sellers?

Joint and several liability

Where obligations are entered into on a ‘joint and several’ basis, each seller agrees to assume liability for the obligations both individually and also collectively on behalf of all the sellers.

Where a buyer subsequently suffers loss or damage arising from a breach of an obligation or wishes to enforce the performance of an obligation, it may pursue all the sellers or any one of them for the whole loss arising from the breach or the failure to perform, regardless of which seller was in fact responsible.

Each seller will be deemed to have the same knowledge as each of the other sellers with whom they are jointly and severally liable. So, where a warranty is qualified by an expression such as ‘so far as the sellers are aware’, if one seller is aware of any relevant facts or circumstances, all the other sellers will be deemed to have that knowledge.

On the death of a joint and several seller, his liability to the buyer will remain in place and will pass to his personal representatives.

Joint liability

Where obligations are entered into on a ‘joint’ basis, each seller agrees to assume collective liability for the obligations given to the buyer.

In practice, the end result for multiple sellers entering into this form of liability will largely be the same as if the obligations had been given on a joint and several basis. One key difference, however, is that the liability of a joint seller will generally cease on death: their liability effectively passes to the surviving sellers rather than to their personal representatives.

In addition, a buyer will usually have to pursue all joint sellers for any loss or damage although if a judgment is obtained the buyer can decide to enforce that judgment against only one seller.

Several liability

Where obligations are entered into on a several basis, each seller agrees to assume separate liability for their obligations. That seller alone will be liable for the whole loss arising from their breach.

Which one to choose?

As a general rule a buyer will prefer the sellers to be liable on a joint and several basis. This gives it the widest possible scope of recovery, allowing it to pursue all or any seller for any breach, depending on who the buyer thinks has the deepest pockets. Each seller will be deemed to have the same knowledge as all the others and the liability of a seller will not cease on death.

For all these reasons, joint and several liability will generally be resisted by multiple sellers who will be keen to avoid liability for the acts of their fellow sellers where they themselves have done nothing wrong. The sellers will usually prefer to share liability on a several basis, particularly where there is a wide discrepancy in the knowledge of the sellers or their shareholdings in the target company. This would ensure that each seller is only liable for their own acts, not those of other sellers. Knowledge of one several seller is not passed to any other seller, so an ‘innocent’ seller cannot be liable for the knowing defaults of another seller.

Joint liability is generally unattractive to both parties. The fact that joint liability ceases on death makes it unappealing to the buyer who could see its pool of potential recovery diminish. For sellers, they could see their potential liability increase by the share of a deceased joint seller.

Ultimately, the way in which liability is shared between multiple sellers will often come down to the respective bargaining power of the parties and the specific circumstances of the deal.

This post was edited by Hannah Fletcher. For more information, email blogs@gateleyuk.com.

Going off piste – Who bears the cost of design changes?

Going off piste – Who bears the cost of design changes?

Posted on 27/02/2015

When a contractor enters into a fixed price contract with an employer, it will be bearing the risk of increasing costs on the project. The fixed price will have been based on a number of factors, not least a design specification.

But what happens when the design consultant decides to go ‘off piste’, and enhances the specification, after the contractor has agreed the fixed price? Who will bear the increased costs then? It will not be the employer, because it is a fixed price contract. So who will it be? The answer depends on the terms of the contract between the contractor and the design consultant, as is well demonstrated in a recent Technology and Construction Court (TCC) case*.

In this case, MW (the contractor) had entered into a contract with Biffa (the employer) for the design and construction of a waste treatment plant in West Sussex. The contract sum was fixed at just under £100 million. The contractor had based its tender for the project on a design proposal produced by Haase Environmental (the design consultant). The design consultant had produced the design proposal under a letter of intent with the contractor.

Once the contractor had entered into the main contract with the employer, it then formally appointed the design consultant. However, within 12 days of entering into the appointment, the contractor found that the design consultant was proposing design enhancements which substantially increased the costs of the project. These costs amounted to millions of pounds.

A dispute then arose, with the contractor saying that the design consultant had breached express terms of the contract, and in particular its obligations to:
1.comply with the design proposal, and
2.obtain consent from the contractor for any changes or enhancements.

On the other hand, the design consultant argued that its overriding duty was to comply with its obligation to exercise all the reasonable, skill, care and diligence to be expected of a design consultant. As long as it had done that, it could enhance the design without being in breach of contract.

The TCC did not buy into the design consultant’s argument. Whilst it agreed that the starting point of a design consultant’s obligations is to exercise reasonable skill and care, the design consultant still has to comply with its other obligations. The design consultant was in breach of its obligations to obtain the contractor’s consent for changes, and was in breach of its obligation to comply with the design proposal. As such, it was in breach of contract, and should therefore bear the liability for the increased costs.

The TCC’s decision is a sensible one. It is common for consultants to be under an obligation to exercise reasonable skill and care, as well as being obliged to comply with certain specific documents or requirements. It would not make commercial sense for a consultant to be able to escape liability for its failure to comply with the contract documents or requirements, simply because it could show that it had exercised reasonable skill and care in carrying out the work.

For more information, email blogs@gateleyuk.com.

*MW High Tech Projects UK Limited v Haase Environmental Consulting GmbH [2015] EWHC 152(TCC)

Footie and a bit of employment law

Footie and a bit of employment law
Posted on 27/02/2015

It’s not often that you get the chance to write about football teams in an employment news blog, but luckily for me, certain media reports about Chelsea’s fans and the dismissal of a Leeds United senior executive have given me a good excuse this week.

The pictures of the Chelsea fans in Paris preventing a passenger from boarding the train due to his race were featured in every major newspaper recently. One headline that stood out was ‘Find jail and sack them all’*. Which from an employment law perspective begged the question what would happen if an employer read this and having recognised one of their employees in the picture sacked them? Would it be an unfair dismissal?

Well the first thing to highlight is that it’s not the first time that the media has demanded employers dismiss badly behaved football fans. During the World Cup in 1998 ugly scenes involving England football fans were broadcast on television, leading to several national newspapers conducting name-and-shame campaigns against the individuals involved. Even the then Prime Minister, Tony Blair, called on employers to take severe action against them. This led to the dismissal of several employees and one claim for unfair dismissal reaching the Court of Appeal**.

The finding in the Tribunal had been that the dismissal was unfair because the newspapers and Mr Blair had unfairly influenced the employer’s decision. However, the Court of Appeal pointed out that it was the unacceptable behaviour of the fans that came first and that had caused the press uproar, brought the employer’s name into disrepute and ultimately caused the dismissal.

Of course, what will be necessary is to ensure that in every case the employer acts reasonably. If the reason for dismissal is the damage to its reputation is there evidence to support that from clients, customers or continued media coverage? If it is in relation to the individual’s conduct has there been a reasonable investigation? Are there reasonable grounds to believe that the employee was involved in the misconduct?

One of the things about dealing with gross misconduct is that it can lead to summary dismissal, which means that the employer doesn’t need to pay the employee any notice monies, a fact that takes us to the issue at the heart of last week’s High Court case regarding Leeds United Football Club***.

One of the Club’s technical directors, on a salary of £200,000 per annum had been given notice that his post was no longer required following a restructure. His contract provided that he was entitled to a notice period of 12-months. One week into that notice period he was told that his contract was to come to an end with immediate effect due to gross misconduct. The Club had discovered that in early 2008, some five and a half years ago, he had forwarded an email titled ‘Looks like dirty Leeds!!’ with several pornographic images attached from his work computer.

The director brought a claim in the High Court that he wanted the rest of his notice pay and other benefits totalling some £250,000. He denied that the email amounted to gross misconduct and suggested that the Club had trawled through his emails to look for a way out of paying him his notice.

However, his claim was dismissed. Sending a pornographic email on the work computer was simply incompatible with his role and duties as a senior manager at the Club and amounted to a sufficiently serious breach of the implied duty of mutual trust and confidence as to entitle the Club to dismiss him without notice.

Again, the risk of damage to the reputation of the employer was an important factor. If the email had been leaked out it would have generated negative press coverage which could have affected the Club’s ability to find or retain sponsors and supporters. Potentially though, the decision could have wider implications. This is not just a reminder of the importance of having a policy regulating the use of IT in the workplace, it is also an effective demonstration of how email and IT records can come back to haunt even the most senior personnel.

This post was edited by Christopher Davies. For more information, email blogs@gateleyuk.com.

*Metro 18 February 2015

**Post Office v Liddiard [2001] EWCA Civ 940

***Williams v Leeds United Football Club EWHC 376 (QB)

Breaking news: ‘Insolvency Carve Out’ continues…

Breaking news: ‘Insolvency Carve Out’ continues…

Posted on 26/02/2015

Following on from our previous post (An end to the insolvency exemption) in what most people had considered to be an unlikely turn of events, particularly in such close proximity to the looming end of the Insolvency ‘Carve Out'(under Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO)), it was announced today in a Written Statement of the House of Commons, that the exemption was to continue.

LASPO received Royal Assent on 1 May 2012. The provisions in part 2 relating to civil litigation funding and costs came into force on 1 April 2013 and prevented the successful party to litigation from recovering a success fee and insurance premium from their opponent. However, there were two exceptions to that, the first related to mesothelioma claims and the second, time limited exemption, related to insolvency proceedings. The exemption, commonly referred to as the ‘Insolvency Carve Out’ was due to come to an end with effect from 1 April 2015.

The delay reflected the fact that insolvency cases generate substantial revenue to creditors, notably the taxpayer, and encourage good business practice. The implementation of LASPO was delayed in respect of insolvency proceedings so that those involved could ‘implement such alternative arrangements as they consider will allow these cases to continue to be pursued’. Alternative arrangements which are considered ‘workable’ are yet to be identified by those at the forefront of the insolvency industry.

Following a forceful lobbying campaign by R3 and various other interested parties, the Government confirmed today that ‘more time is needed’. No fixed period for the extension of the ‘Insolvency Carve Out’ has been prescribed. Solicitors, Insolvency Practitioners and Insurers can now let out a collective sigh of relief, and re-open their social diaries for April, which were due in large part to be written off to deal with Insurance and Conditional Fee Agreements.

This post was edited by Danielle Haston. For more information, email blogs@gateleyuk.com

Why is independent legal advice necessary?

Why is independent legal advice necessary?

Posted on 26/02/2015

When a lender asks for a personal guarantee, it usually comes with the requirement that the proposed guarantor seeks independent legal advice. We are often asked why and what type of legal advice should be given, read on to find out.

The simple answer – undue influence.

When a person has given security for, or has guaranteed a loan to another, and was induced to do so by the ‘undue influence’ of the principal debtor, the security or guarantee may be unenforceable by the lender.

Following the judgment of the House of Lords in Etridge*, a lender is put on notice of undue influence if there is a non-commercial relationship between the parties. In these circumstances, most lenders will require the personal guarantor to seek independent legal advice to provide comfort to the lender that they have not been unduly influenced.

The requirement for independent legal advice also aims to ensure that:
1.the guarantor freely enters into the guarantee; and
2.the guarantor fully understands the consequences and risks associated with giving the guarantee.

What should the independent legal advice cover?

In Etridge, the House of Lords outlined the following ‘core minimum’ requirements for a solicitor when giving independent legal advice:
1.the meeting between the solicitor and the guarantor must be face to face with no other party in attendance;
2.the solicitor must use non-technical language when issuing their advice;
3.the solicitor must explain to the guarantor why they have become involved in the transaction and that the lender will rely upon their involvement to counter any suggestion that there has been any undue influence;
4.the solicitor must explain the nature of the guarantee and any accompanying transactional documents;
5.the solicitor must explain the practical consequences of agreeing to give the guarantee and the risks associated with this, including the seriousness of those risks;
6.the solicitor must make it clear that it is the guarantor’s decision whether to give the guarantee; and
7.the solicitor must ensure that the guarantor is happy to proceed and for them to confirm in writing to the lender that the nature of the documents and associated risks have been explained to the guarantor and the guarantor agreed to give the guarantee.

Are different solicitors required to act for the guarantor?

While the House of Lords in Etridge considered that there were advantages in the guarantor being advised by a separate solicitor to the borrower, the potential cost implications may outweigh those advantages. In light of this, and the professional and legal duties owed by a solicitor to his or her client, the same solicitor may act for both the borrower and the guarantor, provided they are comfortable doing so.

For more information, email blogs@gateleyuk.com.

*Royal Bank of Scotland v Etridge (No 2) and other appeals [2001] 3 FCR 481

Law in the city

Law in the city
Posted on 25/02/2015

I always knew I wanted to work in London after finishing university. The bright lights and big smoke are a draw for many, and London seems to have more than its fair share of graduates embarking upon their chosen careers.

This is particularly prevalent in the city, where our office is located. Many London law firms are based nearby, which is handy if you are required to rush out and have some documents signed or attend a completion. It also means that you can meet for lunch with fellow trainees from other firms to compare notes on your training contract experiences.

The Square Mile is the epicentre of legal and economic development in the UK, and it is exciting to work at the very heart of it. Our office is situated right next to St Paul’s Cathedral. In fact, from my desk I have a stunning view of its pillars that I never tire from looking at, I will be sad to give it up when it is time to change seats. The office also has a beautiful roof terrace which looks directly on to the dome of the Cathedral, a great place to host client events and is always a talking point. I am looking forward to some summer events on the terrace this year, such as last year’s al fresco screening of the Wimbledon semi-final.

Whilst I always knew that I wanted to work in London, I was less keen on the idea of working in a huge firm like some of my friends, I was more attracted to a firm with a smaller trainee intake. The London office suits me perfectly as it is relatively small compared to the firm’s other offices, yet has the backing of the firm’s strong national brand and the high quality work which goes with it.

Something that is really exciting about the London office is that it is growing. It’s inspiring to be somewhere that is expanding and, naturally, as a trainee you want to work in a place where you can see yourself qualifying and building a career. I certainly feel that here.

A perk of being a London trainee in a national firm with a regional focus is that lots of clients (even from other offices) come to London for business, so we have the opportunity to meet many of them. I have even been fortunate enough to be taken for sushi in Mayfair and to The Shard for cocktails with clients of the Manchester office.

Something that I definitely envy of the other trainees, however, is the shorter commute that they enjoy in other cities. As London is so vast and the cost of living is so high, many people live outside of town and travel in by train. Even those of us who live in London face an hour of travel before arriving at our desks.

The firm has undertaken a new initiative for this year’s trainees, where my cohort have had the chance to visit each of the firm’s offices. I felt very lucky to call this area my ‘home turf’ when the other trainees came to London, after taking them on a short tour of some of the local key landmarks.

Something that always strikes me with London is how busy everywhere is, on any day of the week. Nowhere is this more true than in the city, where there is a definite ‘work hard, play hard’ culture. There is a lot of socialising after work due to our proximity to some lovely bars and restaurants, including a karaoke bar, but the less said about that, the better!

This post was edited by Rachael Waugh. For more information, email blogs@gateleyuk.com.

DB to DC or not DB to DC?

DB to DC or not DB to DC?
Posted on February 24, 2015

Whilst this is perhaps not the question that Shakespeare had in mind when penning Hamlet, it is a question that will be at the forefront of the minds of many members, trustees and employers post April after the Budget 2014 flexibilities come into force.

Information, information, information

Various regulatory and governmental bodies including the DWP and the Pensions Regulator (tPR) will be publishing information, regulations and guidance designed to assist all key stakeholders in implementing the Budget 2014 changes. The most recent guidance consultation has been published by tPR and is addressed to Trustees of Defined Benefit (DB) schemes. Although it is based on the Pension Schemes Bill 2014-15 and therefore may change, ‘DB to DC transfers and conversions’ offers a useful and digestible insight into how trustees should approach this topic in light of the potential increase in member queries.

What are tPR’s views?

Whilst acknowledging that trustees’ duties, powers and the statutory basis for the calculation of transfer values has not changed, the consultation notes a number of key areas which trustees need to consider in addition to getting to grips with new benefit categories for the purposes of processing transfers i.e. ‘flexible benefits’ (broadly these are money purchase and cash balance benefits) and ‘safeguarded benefits’ (benefits that are neither money purchase nor cash balance benefits). A couple of these are mentioned below.

Independent advice requirement

Broadly, before a transfer is made trustees will be required to apply appropriate checks to each transfer case where a DB member with over £30,000 of safeguarded benefits wishes to transfer to flexible benefits. These checks include ensuring:

the member has taken advice;
the advice is from a Financial Conduct Authority (FCA) authorised adviser; and
the advice has covered specified prescribed matters (the adviser should provide signed confirmation of a number of points including confirmation of his FCA number, that he has the necessary permission to provide advice on safeguarded benefits, that advice has been given in respect of the transfer and the member’s name and applicable pension scheme).
Transfer requests and processing requests

In addition to existing timelines for transfer value requests which trustees will be familiar with they also need to ensure:

within one month of a transfer request that a member has been notified of the requirement to take independent advice; and
when issuing the statement of entitlement they inform the member again that if he wishes to proceed with the transfer he must provide evidence that he has received independent advice within three months of the guarantee date.
TPR does make it clear that where trustees have made checks to ensure that appropriate advice has been taken but this cannot be confirmed, trustees must not proceed with the transfer request.

TPR also states that trustees should keep under consideration the impact that the number and size of transfer requests could have on their scheme’s funding position. For example, in respect of smaller schemes, the departure of a few members with large pensions could have a disproportionate impact on the scheme’s funding position.

What should trustees do?

Key areas for trustees to focus on will be:

reviewing member communications including scheme booklets to ensure they are appropriate and compliant;
supporting members by signposting relevant information and advice providers;
monitoring demand for transfers and their impact on scheme funding;
evaluating the impact of transfers on investments and the ability to make those transfer payments; and
checking that appropriate confirmations have been received from the advisers of members seeking to transfer and retaining records of the checks undertaken.
The closing date for responses to the consultation is 17 March 2015 and further guidance is expected in early March following publication of regulations by the DWP. The run up to April promises to be a hectic one for trustees whether members choose to transfer DB to DC or not.

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