Dealing With Breach of Patent

When you discover that a business has breached your patent, what should you do?

The answer to this question has two elements. The first is based on what you can do in law and the second is based on business strategy.

Firstly, before picking a fight with anyone over such a matter, it is important to make sure that you are on firm ground, so do your research carefully. Make sure there is a real infringement and that the infringement is in a market in which your patent applies.

In law, if a business infringes a patent, it is liable to pay damages to the patent owner, which will be based on the loss suffered by the owner. In theory, losses suffered will be compensated for but, in practice, allowing an infringement to continue while you negotiate with (or sue) the infringing business is a high-risk strategy. In most cases, especially where the effect of the patent infringement is severe (for example, where its use directly affects your sales), it is likely that you should send a legal notice to the offending business requiring it to cease the infringement immediately.

This will normally produce one of the following responses:

1. The infringer will agree, cease the infringement and (hopefully) enter into discussions with you about the appropriate payment to make to you by way of compensation. Regrettably, this is not the most common response.

2. The notice will be ignored. In this case, the infringer either hopes that your letter is a bluff and you will not take legal proceedings or believes that it has not infringed your patent and would win that argument were the matter to come to court. Under these circumstances, it is doubly important to do your homework and make sure of your position as legal proceedings are likely to be necessary.

3. Your notice will be met with a denial from the infringer (and occasionally a counter-claim that one of your products infringes its patent). In this case, there is a fight there if you want it (or sometimes even if you don’t).

No matter what the response, in the majority of cases the most satisfactory outcome will usually result from negotiation with the benefit of expert advice, rather than court proceedings. Commercial considerations must be kept at the forefront and it is normally advisable to leave the door open to a negotiated settlement. This is especially so as one of the common outcomes of such disputes is the creation of a licensing agreement, which will require specialist legal advice.

See guidance from the UKIPO.

Costs Awards in Employment Tribunal Proceedings

Costs orders are the exception, rather than the rule, in Employment Tribunal (ET) proceedings. However, where a claimant acts unreasonably in pursuing a claim, the ET can make a costs award in favour of the other party.

In Dunedin Canmore Housing Association Ltd. v Donaldson, the Employment Appeal Tribunal (EAT), when referring to the circumstances in this case and also those in Daleside Nursing Home Ltd. v Mathew, held that where a claimant does not approach the essential facts of the case honestly and reasonably, the ET has a responsibility to ‘make it clear that it is quite unacceptable to cause expense to another party by bringing proceedings on that basis’.

In a more recent case (Nicolson Highlandwear Ltd. v Nicolson), the Scottish EAT confirmed that the appropriate test for making a costs award is whether or not the claimant acted unreasonably in pursuing their claim, not whether or not they succeeded in any aspect of the claim.

Gordon Nicolson, who had originally been a director of the company, was dismissed from his job as retail manager of Nicolson Highlandwear Ltd., which engaged in wholesaling, retailing and hiring out highland wear, after his employer discovered various financial irregularities and that Mr Nicolson was running his own clothing business from the company premises.

Mr Nicolson brought a claim of unfair dismissal. The company responded that he was guilty of gross misconduct and even if his dismissal was found to be unfair, he should not be awarded compensation.

The ET found that Mr Nicolson had been ‘automatically’ unfairly dismissed because his employer had failed to follow the statutory dismissal procedures in force at that time. However, because his own gross misconduct, which ‘some people might describe prima facie as amounting to fraud’, led directly to his dismissal, no compensation award was made. The ET refused the employer’s application for costs. In its view, Mr Nicolson was entitled to seek a declaration that he had been unfairly dismissed, even though he was denied compensation. Also, the fact that he had won meant that it was reasonable for him to have brought his claim, even though no compensation was awarded.

On appeal, the EAT held that the ET’s decision that Mr Nicolson did not act unreasonably by pursuing a claim in which, even if successful, he was unlikely to recover any compensation, was perverse. There was no basis for the ET’s decision that the fact that he had won his claim showed there could be little merit in the application for costs. Furthermore, the ET was wrong to find that it was open to him to pursue his claim for the purpose of obtaining a declaration that he was unfairly dismissed. When bringing a claim of unfair dismissal, the only options available to a claimant when specifying the remedy they are seeking are (a) reinstatement, (b) re-engagement and compensation or (c) compensation only. In any case, Mr Nicolson had ticked box (c).

Mr Nicolson had admitted that he had behaved dishonestly and the only conclusion open to the ET was that he had acted unreasonably in bringing the claim at all and, having brought it, by persisting with it even after it had been made clear that his employer would be relying on his fraudulent conduct to defend the claim and arguing that he should not be granted compensation. In the EAT’s view, ‘the unreasonableness was such as would have led any reasonable Employment Judge to conclude that an award of expenses ought to be made’.

Bank Deposit Protection Rules for Businesses

In December 2010, new limits were announced for the levels of protection available for different investments underwritten by the Financial Services Compensation Scheme (FSCS).

The FSCS protects the deposits of small companies, which are those which meet two of three criteria:

• they have fewer than 50 employees;
• their turnover is not more than £6.5 million per year; and
• the balance sheet total is less than £3.26 million.

The £85,000 limit is also available for unincorporated organisations, partnerships and sole traders, but in the latter case the limit would apply in total to all (i.e. business and personal) accounts held by the customer with the same lender.

One possible area for concern is whether deposits held in different members of the same banking group are covered separately. In this case, if each of the banks is separately authorised by the Financial Services Authority, the FSCS would pay compensation up to the limit of £85,000 per person (from 31 December 2010, the limit is being raised to the sterling equivalent of €100,000), per authorised institution. If each of the banks is not separately authorised but is covered by the parent company's authorisation, the FSCS would pay compensation up to the limit of £85,000 once, irrespective of how many different group members a person held accounts with.

In July 2009, it was announced that the scheme was being improved for those with deposits at and loans from the same bank. These will now be 'netted off' for the purposes of compensation, which will improve the position for some customers.

Deposit takers in the Channel Islands and Isle of Man are not covered by the scheme.

Compensation for Loss of Light

Following a recent case in which a dispute regarding a property owner’s right to light was unexpectedly dealt with by the granting of an injunction against a developer, a more recent case has offered guidance on how much compensation might be payable by a developer who takes the light of another property in the more normal circumstance in which the court rules that compensation is payable.

The principles which will normally apply in assessing the damages payable are that they should be:

• fair – in other words, an amount such as would be likely to be agreed following negotiations between the interested parties;
• appropriate bearing in mind the context of the breach and its nature;
• made with the awareness of the strength of the bargaining position that is created by the right to claim injunctive relief, thus preventing or limiting a development, and the profit that thereby might accrue to the person able to claim the injunctive relief;
• based on a fair percentage of the anticipated size of the profit, but if the profit is not known, the appropriate measure is a suitable multiple based on the loss of amenity;
• not so large that the development would not have gone ahead had it been payable; and
• fitting in the circumstances, after taking into consideration all the other relevant factors.

In the case in point, the court awarded the applicant a sum estimated to be 30 per cent of the developer’s expected profits. If unchallenged, the practical implication of this case is that developers whose developments are likely to take the light of adjacent property owners should be aware that failing to negotiate a favourable position at the outset might lead to a considerable reduction in the development profit should the matter end up being decided in court.

In a more recent case, the court ordered that the builder of an office block must demolish the top two stories (part of which were already tenanted) because they took the light of a nearby listed building. This decision is currently under appeal.

If loss of light is an issue for you, the Royal Institute of Chartered Surveyors has issued guidance for its members which will make informative reading.

In 2011, the Government announced it is to review of the law in this area.

Company Name Rules

You cannot incorporate a company using any name you like. Some names are prohibited (for example, those which suggest a connection with the Government or the Crown) and names will not be allowed if they are too similar to the names of existing companies.

It is a straightforward matter for a company to object to the registration of a company name which could be confused with its own name. The new rules for registration of a company name can be found on the website of the UK Intellectual Property Office.

Companies House provides guidance on the rules for choosing names for new companies. Don't forget to check that the associated Internet domain name is available as well.

Business Relief - Traps for the Unwary

Most business people know that for family businesses there are generous Inheritance Tax (IHT) reliefs, which generally operate to make assets used in the business exempt or partially exempt from IHT. The reliefs take various forms but have been collectively known as Business Property Relief (BPR), although HM Revenue and Customs (HMRC) have changed the name to 'Business Relief'.

Consider, however, the common situation whereby a business is owned by a small number of people and, in order to preserve the business in the event of the death of a shareholder before retirement, an agreement is made whereby on death the deceased’s personal representatives are required to sell their shareholding to the remaining shareholders, who are required to buy it. Such arrangements are normally funded by writing life assurance policies to cover the purchase.

Regrettably, such an arrangement will prevent the operation of BPR. This is because HMRC regard such an arrangement as a binding contract for sale on death and where such a binding contract exists, BPR is not given. This problem can be avoided by granting each side the appropriate option, rather than making the requirement to buy the shares contractual.

BPR is also not given on family company shares if the company is wholly or mainly engaged in dealing in shares or securities, dealing in land or buildings or making or holding investments. The normal practice of HMRC is to define ‘mainly’ as being ‘more than fifty per cent’. The fifty per cent test is applied to all of:

• the capital employed;
• employee time spent on each activity;
• turnover;
• profits; and
• the overall context of the business.

In other words, a ‘whole business’ view has to be taken. Needless to say, this has led to much dispute over the years.

Lastly, a business which is too ‘cash rich’ can also face a denial of BPR insofar as it applies to the cash on the balance sheet at the date of death if this is in excess of the amount required for the purposes of the company’s business. Cash in excess of that required for the company’s future business is ‘excepted’ from eligibility for BPR. In one case, the shareholders of a company which had £450,000 in its balance sheet, but which was reckoned by the tax inspector to need only £150,000, faced an IHT charge on the ‘excess’ of £300,000. One way which this type of charge may be avoided is to hold board meetings and minute the need for cash balances to be held on the balance sheet in order to finance future (stated) investment and/or trading needs.

HMRC provides guidance on BPR on its website.

Construction Act Changes

On 1 October 2011, changes to the Housing Grants, Construction and Regeneration Act 1996 (normally called the Construction Act) came into force. These apply to all relevant contracts entered into from that date.

The changes include:

• The removal of the requirement that construction contracts covered by the Act must be in writing;
• The abolition of clauses which require the party putting a matter to adjudication to meet the costs of the adjudication – any such agreement will be ineffective unless it is in writing and has been made after the giving of notice of intention to refer the dispute to adjudication;
• The abolition of ‘pay when certified’ clauses. These effectively pass the debt risk of the contractor ‘down the chain’ to subcontractors, who are not entitled to payment until the contractor is entitled to be paid;
• The requirement that a mechanism for raising payment notices be included in the contract. This must state whether the notices are to be issued by the payer or payee. Each notice must set out the sum due (even if nil) and how it has been calculated; and
• The permitting of partial suspension of work under a contract while disputes are negotiated. Previously, suspension was an ‘all or nothing’ remedy.

The changes are significant and raise the possibility that disputes may increase because verbal contracts or variations of contracts are alleged to have been made. For contractors, the abolition of ‘pay when certified’ clauses may lead to significant financial issues. In addition, standard documentation will need to be revised. The Joint Contracts Tribunal will be issuing new standard documentation to accommodate the changes.

Damages for Wrongful Dismissal

The Supreme Court has ruled (Edwards v Chesterfield Royal Hospital NHS Foundation Trust) that a consultant surgeon who suffered a loss as a result of findings of personal and professional misconduct made against him in disciplinary proceedings that were conducted in breach of his employment contract cannot seek to recover damages in the ordinary courts for loss suffered as a result of the breach.

Michael Edwards was dismissed for gross professional and personal misconduct following a disciplinary hearing regarding allegations made against him by a patient. His contract of employment contained a clause to the effect that matters of professional misconduct or incompetence would be dealt with under a procedure negotiated and agreed by the Local Negotiation Committee. He contended that the General Medical Council had investigated and dismissed the allegations made against him and had his employer followed the correct disciplinary procedure as laid down in his contract of employment, it too would have exonerated him.

Mr Edwards brought a claim of unfair dismissal to the Employment Tribunal (ET). He then changed his mind and withdrew the claim, deciding instead to pursue a claim through the courts for losses arising from a breach of contract. He was seeking more than £4 million in damages for loss of past and future earnings because he claimed his employer’s actions had ruined his career.

The Court of Appeal had found that the law does not preclude an action for unlimited damages for breach of an express contractual obligation such as the agreed disciplinary procedure in this case. However, in a majority decision the Supreme Court held that dismissal damages could only be recovered where the loss could be said to precede and be independent of any subsequent dismissal. No separate contractual claim is available where the breach of contract relates to the manner of the employee’s dismissal, as was the case here. Unless the employment contract expressly contains agreement to the contrary, the remedy for wrongful dismissal as a result of a breach of disciplinary procedures lies in a claim to the Employment Tribunal under the provisions of the Employment Rights Act 1996. In the Court’s opinion, Parliament could not have intended that where disciplinary procedures have contractual status, any breach could give rise to a common law claim for damages.

This decision will come as a relief to employers as claims that the manner in which a dismissal was carried out was unfair will be dealt with by the ET where the maximum compensation award for unfair dismissal is limited to the statutory cap of £72,300.

Collective Redundancy Consultation

Employers should be aware of the potentially serious financial consequences of failing to consult when making collective redundancies.

If an employer is proposing to make redundant 20 or more employees at one establishment within a period of 90 days or less, the collective consultation provisions of Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) come into play. Where the employer is proposing to dismiss 100 or more employees, the consultation period must be at least 90 days; otherwise it must be at least 30 days. Failure to consult with the appropriate representatives of affected employees can lead to a protective award requiring the employer to pay each affected employee 90 days’ pay. Even if the obligation to consult is for a minimum 30-day period, a serious breach of the requirement can result in employees being granted a 90-day protective award.

Genuine efforts to consult must be made – merely keeping employees informed does not fulfil this duty. Consultation of the required duration must take place before any employees are given redundancy notices. Consultation must be meaningful, with a view to reaching an agreement. If the decision to dismiss employees has already been taken, it effectively compromises the consultation process.

In addition, in a collective redundancy situation, the employer has a statutory duty to notify the Secretary of State for the Department for Business, Innovation and Skills before giving notice to terminate an employee’s contract. If an employer fails to give the required notification, the Secretary of State may institute legal proceedings that could lead, on summary conviction, to a fine of up to £5,000.

The obligation to consult over avoiding proposed redundancies extends to consultations over the reasons for the closure of a business. Where it is recognised that dismissals will inevitably, or almost inevitably, result from closure, dismissals are proposed at the point when the closure of the business is proposed. Where closure and dismissals are inextricably linked, the duty to consult over the reasons for the closure arises.

Collective consultation does not replace the need to consult with individuals who may be made redundant in order for any subsequent dismissal to be fair.

It is important that employers are aware of this requirement to consult at an early stage in the decision-making process. Making employees redundant always requires care and advice should be sought as soon as redundancies are contemplated. Restructuring a business, even where staff may not actually leave your employment, also carries with it potential risks. Care must always be taken where fundamental changes are made to employees’ jobs. We can help ensure that a proposed redundancy programme or the restructuring of your business is carried out with the minimum risk of unanticipated financial consequences.

As part of its ‘Red Tape Challenge’, the Government recently carried out a consultation exercise on whether the current 90-day minimum consultation period where more than 100 redundancies are contemplated can be reduced.

Age Discrimination - Life After the Abolition of the Default Retirement Age

The Default Retirement Age (DRA) has now been abolished and it is no longer permissible for an employer to dismiss an older worker on the ground of retirement unless this can be objectively justified under the Equality Act 2010.

This does not mean that employees will never be able to retire, but that an employer cannot lawfully force an employee to retire at a set age unless the age can be objectively justified under the Equality Act. If this is not possible, the employer faces the double threat of a claim for age discrimination and for unfair dismissal.

Employers therefore have two options. These are:

• to stop retiring people and use other dismissal options where necessary; or
• to use an Employer Justified Retirement Age (EJRA).

For a set retirement age to be objectively justified, its use must be a proportionate means of achieving a legitimate aim. This is not an easy test to pass, and businesses who do wish to have in place an EJRA are advised to seek legal advice before choosing this option. An EJRA will normally be appropriate for occupations where retirement at a particular age can be justified on health and safety grounds – for example for airline pilots or fire fighters. Employers must provide evidence that the chosen EJRA is necessary – not based merely on assumptions – and be able to demonstrate that no alternative or less discriminatory action could achieve the same result. Employers who have chosen to use an EJRA must follow a fair procedure, giving the employee adequate notice of their impending retirement and, if circumstances permit, consider any request to work beyond the EJRA as an exception to the normal policy. However, it is important to have procedures in place to ensure consistency of treatment of employees who request to stay on.

Older employees can retire voluntarily at a time of their choosing and draw any occupational pension to which they are entitled under the rules of the scheme. If an employee has given formal notice that they wish to retire, the employer is under no obligation to permit them to withdraw their notice should they change their mind. If, however, an employee has only told their employer that they plan to retire, they can change their mind before formal notice is given.

Great care must be taken if an older employee is performing badly. Procedures for dealing with performance issues must be fair and applied consistently across all age groups. To avoid a claim of unfair dismissal, any dismissal must be for one of the potentially fair reasons for dismissal under the Employment Rights Act 1996. Care must also be taken that any decisions taken by the employer do not discriminate against an employee who has a condition that constitutes a disability under the Equality Act. In such cases, the employer has a duty to make reasonable adjustments to remove any barriers to the employee’s performance.

Group risk insured benefits are exempt from the principle of equal treatment on the grounds of age, so employers who provide such benefits can cease to provide or offer them to employees who reach the State Pension Age, even if they continue to work beyond that age. The age at which group risk insured benefits can be withdrawn will increase in line with increases in the State Pension Age.

Whilst the abolition of the DRA gives employees greater choice and flexibility over when to retire, the move has been criticised as having a negative impact on an employer’s ability to plan workforce requirements to meet future business needs.

The Advisory, Conciliation and Arbitration Service has published guidance for employers, entitled ‘Working Without the Default Retirement Age’, which contains useful advice on a possible framework for workplace discussions that will help identify an employee’s future aims, and gives examples of ways of raising the issue of retirement without asking questions that could be seen as discriminatory.

Data Protection Guidance for Landlords

The Information Commissioner's best practice guide for landlords - written to to assist them in complying with the Data Protection Act can be downloaded from the Information Commissioner’s website. The guide includes a checklist which is intended to assist landlords in ensuring that the data they hold on their tenants is only given out to third parties in accordance with the Act. It also has a section on frequently asked questions on data protection matters.

View the eight data protection principles.

Administration of Troncs

The long-running series of disputes between employers in the hospitality industry and HM Revenue and Customs (HMRC) concerning the taxation of employees’ tips and their National Insurance (NI) status seems to have been concluded by the issue of guidance on the operation of ‘troncs’.

HMRC have, in effect, accepted the industry’s contentions regarding these. The following points have been clarified:

• no approval from HMRC is required for the appointment of a troncmaster;
• the troncmaster can be anyone other than ‘the employer, business partner, or official of the company’ (so a manager is acceptable);
• the business can retain discretionary service and non-cash tips without compromising the NI status of the tronc – only the sums passed to the troncmaster constitute the tronc;
• any amount of tronc paid in excess of tips specified in the employee’s contract of employment does not incur a NI liability; and
• the National Minimum Wage (NMW) is confirmed as not being a contractual obligation for the purposes of NI contributions and if tronc money is independently allocated and paid via the payroll, NI contributions will only be payable on the salary element of the pay. This allows payment of basic salaries below the NMW.

HMRC do not accept that tronc money paid independently of the payroll can be counted towards the NMW.

Contractors Are Your Responsibility

A handbook produced by the Health and Safety Executive (HSE) outlines the responsibilities of both the contractor and the client in situations in which work is carried out by contractors rather then employees. It does not apply to circumstances in which the Construction (Design and Management) Regulations apply or to work done by agency workers.

The leaflet begins from the premise that 'all parties must co-operate to ensure that health and safety is properly managed'.

Under health and safety law, both the contractor and the client have responsibilities. The client must identify all aspects of the job that they want the contractor to do and then carry out a risk assessment. They must satisfy themselves that the contractor they have chosen is competent to carry out the job without unacceptable health and safety risks and must explain their procedures and systems to the contractor sufficiently well for them to understand them and act in accordance with them.

The risk assessment should be carried out with the contractor, who will normally be responsible in the same way as the client for any sub-contractors, who should also be part of any relevant risk assessment.

Clients, contractors and sub-contractors must keep their employees properly briefed on any matters that may affect their health and safety.

The guide is another illustration of the Government's intention to improve compliance with health and safety regulations. What is most problematic here is the need for the client to assess the competence of the contractor, which is a potential source of problems for many firms. We can advise you on any legal issues arising out of health and safety matters.

Recent case law has made firms responsible for a number of actions taken by subcontractors, especially where they are under the direct control of the ultimate employer. Just because a person is employed directly by another business they will not necessarily be their responsibility alone.

In April 2008, the Corporate Manslaughter and Corporate Homicide Act 2007 came into effect, which has profound implications for businesses. The Ministry of Justice has issued a comprehensive guide.

Company Formation Checklist

You may have come across advertisements which make forming a company sound very easy, but before you go ahead there are some serious issues to think through. If you have decided that a company is the best vehicle for your new venture then here is a checklist:

Decide what to include in the Articles of Association and Memorandum of Incorporation. These documents lay down how the company is to be structured and what its operating procedures will be. Include the names of the director(s) and company secretary (if necessary). Include any positions that have special names or rights (e.g. managing director) and any specific limitations on directors;

Determine who will own the shares and in what proportions. Changing this later on is fraught with potential tax traps;

If you own trademarks you need to decide whether to keep them or sell or lease them to the company;

If the company will use a property owned by a director you need to decide whether or not you should have a lease. There are many tax considerations attaching to this, so take advice before you act;

Cars can be a major source of friction is small businesses. Take advice on whether cars should be owned by the company or kept out, how they are financed, insured and how you are going to meet travelling expenses;

Give thought to what the ‘corporate look’ is going to be. If you plan to use a trade name, do a search to make sure the company name AND trade name can be used without legal ramifications. Companies House produce a free guidance on many company issues including basic guidance on the Comapanies Act 2006;

Your stationery, website and emails must show your registered number and other details. Adding your VAT number is usually a good idea (particularly if stationery will be used for invoices) so you will need to sort out these details before you can get your stationery printed. There is helpful information in the guidance issued by Companies House on company formation;

If your turnover is omore than the VAT limit you must register for VAT. You must also tell HM Revenue and Customs (HMRC) that the company is trading. Failure to do so within the time limit may lead to a fine. Even if you do not need an audit, you will probably have to appoint accountants to make sure your accounts comply with the Companies Act ;

By law employers must have employers’ liability insurance. However, very small companies which employ only their majority shareholder are exempt from the requirement to carry employers’ liability compulsory insurance. This has brought them into line with sole traders who do not employ anyone else;

Also, contact your local HMRC office for the employer's PAYE pack. The HMRC website has helpful leaflets;

Normally, you will not be able to open a corporate bank account until your bank has seen the company’s certificate of incorporation. If you need borrowing, consider what security can be offered and who will give guarantees if necessary;

Employees have numerous rights and it is important to know which laws apply to you and to be ready for forthcoming legislation. For example, all employees are entitled to a written statement of their terms of employment.

Company Disclosure Rules

The Companies (Trading Disclosures) Regulations 2008 set out the the requirements as to where and when company trading names, names of directors etc. need to be shown. The Statutory Instrument implementing the changes is both short and straightforward.

In particular, Section 6 is important. It specifies that every company shall disclose its registered name on:

• business letters, notices and other official publications;
• bills of exchange, promissory notes, endorsements and order forms;
• cheques purporting to be signed by or on behalf of the company;
• orders for money, goods or services purporting to be signed by or on behalf of the company;
• invoices and other demands for payment, receipts and letters of credit;
• applications for licences to carry on a trade or activity; and
• all other forms of its business correspondence and documentation.

In addition, it requires that every company shall disclose its registered name on its website.

Companies Act Model Articles - Think First

However, before you rush off and buy an ‘off the shelf’ company, pause to consider this – it is usually much more sensible to start with the right articles than to amend ‘standard’ articles to say what you mean later.

Articles tend to be of little importance to directors and shareholders until the company has ‘grown up’ a bit – by which time vested interests can be strong and changes to the internal regulations, such as alteration of share capital rights and so on, can be difficult and full of hidden pitfalls. These sorts of issues can prove a disaster when there are discussions ongoing relating to the retirement of director-shareholders or a proposed purchase of the business or of a shareholding in it.

Considering Outsourcing

These days more and more processes are being outsourced (run by external contractors under a service agreement) by more and more businesses. It is particularly common to outsource IT functions and telephone call management.

Outsourcing can offer many advantages - for example, cost reductions, access to better technology and the ability to prevent management attention being diverted by 'non-core' activities within the business.

However, unless the contractual side of an outsourcing arrangement is right, the results can be a disappointment, or worse.

The steps to take in order to make sure your outsourcing is successful are:

1. Make sure your objectives are clear. You should know precisely what benefits you are expecting the outsourcing to bring to your business;
2. Before you start the outsourcing process, look at your own working methods and make them efficient. Having done this, you may even find you no longer want to outsource! Never outsource a mess;
3. Carry out a thorough costs analysis. Know exactly what your system costs to operate;
4. Create an invitation to tender. Specify precisely what needs to be done and what your necessary performance criteria are. This will form the basis of your contract with the supplier, so take care. Generally, it is better to express the requirements in terms of outputs (things that must be done) rather than in technical terms. Let the supplier deal with the technical side, but make sure the contract is clear on what you will get out of the process;
5. Shortlist suppliers. It is important that the proposed supplier understands your business and its needs - both now and in the future. Contact existing customers of the supplier to find out what they think of the service they receive. Look at the supplier's finances to ensure they have sufficient financial strength to see the contract through;
6. Negotiate your contract very carefully. Make sure every critical part of the process is properly documented and dealt with in the contract;
7. Develop a transition plan to ensure your service standards continue to be met while the new system is being implemented. This is an important part of the 'who does what and when';
8. Develop a service level agreement, which makes the outsourced service provider specifically responsible for delivering the agreed goals;
9. Make sure you have a disaster plan and an exit strategy. Plan for the worst. If it happens, you will be glad you did. Set up a system which allows a clear mechanism for dealing with any disputes or service failures.

The Information Commissioner's office has published useful guidance on outsourcing and data protection issues for smaller businesses, which should be read by anyone considering using outsourcing.

Buying from an Administrator - Take Care

With businesses becoming insolvent in large numbers, opportunities abound to acquire assets from their administrators. However, the low prices sought for the assets are due, at least in part, to the additional risk to the purchaser.

Here are some of the main issues to be aware of when buying property from an administrator:

• Vacant possession of a property will not normally be guaranteed and the cost of clearance of items left in the building should be borne in mind;

• No guarantees or warranties regarding the property will be given – undertaking proper due diligence to reduce risks is advisable;

• There may be items that appear to be a part of the property being sold which do not in fact belong to the insolvent business; and

• The administrator acts only as agent for the insolvent company and will accept no liability for errors or omissions.

Buying a property from an administrator is a risky business. We can help you to control the legal risks.

Compromise Agreements - Tax Position Clarified

A compromise agreement is an agreement made between an employer and an employee who is having their contract of employment terminated. It sets out the terms under which the termination will take place and contains a provision that the employee will receive a lump sum payment. It is normal for such an agreement to contain a clause to the effect that as a result of the agreement, the employee will not take any legal action as regards the termination of their employment. The agreement therefore acts as a protection for the employer. Normally in such circumstances payments up to £30,000 are exempt from a charge to income tax.

To be accepted as a full and final settlement, the agreement must be in writing and relate to the particular proceedings. It must be entered into by the employee under independent advice and the adviser must be identified in the agreement and must have professional indemnity insurance covering the advice given. The agreement must also state that the above conditions are satisfied.

Recently, the Inland Revenue attempted to tax the lump sum payments made in such cases. Their argument was that where the compromise agreement stipulates that in the event of a future legal action between the parties, the payment is refundable (a common clause), the whole amount of the payment would be taxable in the hands of the employee.

Following protests, the Revenue has backed down, agreeing that:

• compromise agreements contain an implied undertaking not to issue proceedings against the employer;
• it makes no difference if that undertaking is set out expressly as part of a repayment clause provided the sum of money payable under the compromise agreement is a real attempt to compromise the substantive claims;
• no tax is chargeable on any aspect of the monies paid under a compromise agreement, even where that money is repayable if the employee breaches an undertaking not to commence litigation.

However, if the amount paid under the agreement is excessive with regard to the right to take action forgone, the Revenue reserves the right to investigate.

Compromise Agreements

As a general rule, ‘out of court settlements’ of employment disputes are not legally binding in that they cannot exclude an employee's right to take the matter concerned to an Employment Tribunal (ET). A formal compromise agreement is one of the few exceptions to this rule.

A compromise agreement is a legally binding agreement by which an employee undertakes to refrain from instigating ET proceedings against his or her employer or, if proceedings have already commenced, to discontinue them in return for consideration. Compromise agreements were created by s. 203 of the Employment Rights Act 1996 (ERA) and must comply with the stringent requirements of that section.

The Court of Appeal has ruled (Hinton v University of East London) that in order for a compromise agreement to be effective, it must expressly specify the cause of action being settled.

Dr Hinton retired early from a senior lecturing position with the University of East London (UEL). He signed a compromise agreement with the university, in accordance with s. 203 of the ERA. During negotiations he had raised the possibility of a claim in accordance with s. 47B of the ERA (which protects employees who make public interest disclosures from suffering a detriment) but the compromise agreement contained no specific mention of this.

Dr Hinton subsequently sought to pursue a claim under s. 47B. His argument was that an employment law claim could be waived only if the compromise agreement complied with the requirements of s. 203 of the ERA, which requires the agreement to relate to the particular complaint. As the s. 47B claim was not mentioned in the agreement, the agreement could not therefore be said to ‘relate’ to that particular complaint. Consequently, the s. 47B claim was still live.

The ET allowed Dr Hinton’s claim to proceed. The Employment Appeal Tribunal overruled this decision and so Dr Hinton appealed to the Court of Appeal.

The Court granted Dr Hinton’s appeal, allowing the s. 47B claim to proceed to hearing on the grounds that compromise agreements were created to encourage parties to settle their disputes while protecting employees from unknowingly signing away the right to instigate proceedings before an ET. In order to ensure that the employee fully understands which rights are being waived, the agreement should list all potential claims. For clarity’s sake each claim should be accompanied by a brief description. In this case, UEL was aware of the potential s. 47B claim and as the agreement did not refer to it specifically, it was not compromised.

Tax Position

Normally in such circumstances payments up to £30,000 are exempt from a charge to income tax.
In the past, HM Revenue and Customs (HMRC) had attempted to tax the lump sum payments made in such cases. Their argument was that where the compromise agreement stipulates that in the event of a future legal action between the parties, the payment is refundable (a common clause), the whole amount of the payment would be taxable in the hands of the employee.

Following protests, HMRC backed down, agreeing that:

• compromise agreements contain an implied undertaking not to issue proceedings against the employer;

• it makes no difference if that undertaking is set out expressly as part of a repayment clause provided the sum of money payable under the compromise agreement is a real attempt to compromise the substantive claims;

• no tax is chargeable on any aspect of the monies paid under a compromise agreement, even where that money is repayable if the employee breaches an undertaking not to commence litigation.

However, if the amount paid under the agreement is excessive with regard to the right to take action forgone, HMRC reserve the right to investigate.

Compromise agreements remain a good way to avoid litigation and achieve certainty. However, if the agreement is badly drafted the employer will remain vulnerable to the possibility of tribunal proceedings and further expense. If you wish to enter into such an agreement, we can assist you to ensure that all potential claims have been compromised.

Bribery Act Guidance

The Government provides guidance for businesses on complying with the Bribery Act 2010, which came into force on 1 July 2011. The Act was originally scheduled to take effect in April 2011, but its implementation was delayed to allow the final version of the guidance to be completed.

Section 7 of the Act makes it an offence for a commercial organisation to fail to prevent bribery. A business can provide a defence by showing that it had in place adequate procedures to prevent bribery from taking place, however, and the guidance details the approach that should be taken when implementing such procedures. The overriding point is that these should be proportionate in view of the likelihood of bribery occurring, which will depend on the size of the business and the countries and markets in which it operates. Although the principles remain similar to those in the draft guidance, published in September 2010, the advice in the final version is more detailed.

Section 14 of the Act provides that where an offence is committed with the consent or connivance of a senior officer of an organisation, that person (as well as the body corporate or partnership) is guilty of the offence and liable to be proceeded against and punished accordingly.

Under Section 11 of the Act, the maximum penalty for individuals is 10 years’ imprisonment or an unlimited fine, or both. The maximum penalty for commercial organisations is an unlimited fine.

The guidance includes case studies to illustrate what approach businesses might take in certain situations and can be found here. There is also a ‘quick start guide’ to the Act.

Are You Data Friendly?

Many businesses regard the Data Protection Act 1998 as something that merely requires a lot of form filling and the payment of fees, but there is a lot more to it than that.

The purpose of the Act is to protect a person's right to privacy with regard to the processing of their personal information. Individuals (‘data subjects’ in the terminology) have the right of access to information held about them. For example, a customer of your business has the right to contact you to request a copy of any data you hold on them so that they can check it. This is called a 'subject access request' (SAR). You are required by law to supply the information requested (once you have checked that they are who they say they are, of course). The individual making the request has the right to see data held in any form, not just that held on computer, so storing information in paper form does not avoid the responsibility.

If you receive a SAR, you are required to supply not only all the information you hold on the data subject but also a description of why the information is processed, details of anyone it may be passed to or seen by, and the logic involved in any automated decisions. If you unjustifiably fail to comply with a SAR, the courts may impose a fine of up to £5,000. Any person who believes they have suffered damage and/or distress as a result of a contravention of the Act may seek compensation by applying to the High Court.

In the case of a failure to comply with a subject access request the Court may award compensation for distress alone.

The interpretation of the Court of Appeal is that ‘personal data’ has been defined in such a way that employees are only entitled to see information which is biographical ‘in a significant sense’ and which has the data subject as its focus. The mere mention of a person’s name does not entitle them to see the documents concerned.

View the eight data protection principles.

Advice on Acquisitions Deductible

One common area of dispute between companies and the HM Revenue and Customs (HMRC) is that of deductibility of expenses. One of the hottest areas of dispute is often whether an expense is a trading expense (deductible as part of the day-to-day running costs of the company) or a capital expense, which is normally allowable only through the capital allowances regime, if at all.

In a recent case, the Court of Appeal considered the position of an investment company which had incurred significant professional fees securing advice on the possible acquisition of another company.

The position arose because the company claiming the tax relief on the expenditure had identified another company as a possible merger or acquisition target. After obtaining a great deal of accounting, legal and financial advice in order to evaluate the merits of the proposed acquisition, they made an offer to the board of the other company. The offer was rejected and was not pursued.

HMRC denied the company's claim for tax relief on the bills for the professional advice. The decision turned on the question of the treatment of the expenditure. Were the expenses management expenses deductible under the Taxes Act (S 75(1) ICTA 1988) or were they, as the Revenue claimed, capital expenses and thus not allowable as deductions in the corporation tax computation?

The judges accepted the company's argument, accepting that even if the acquisition had gone ahead, the expenditure would have been treated as a trading expense and not as part of the cost of the purchase of the target company. It was therefore a revenue item, not a capital item, and was deductible for corporation tax purposes.

The tax authorities not infrequently will fight taxpayers on issues in spite of their own arguments not being strong. A robust approach from the taxpayer can often be effective. To achieve the best result, sound advice is essential.

Data Loss - What to Do

The Information Commissioner's Office (ICO) has issued guidance for organisations that lose personal data, having reported that it has been notified of nearly 100 such incidents to date.

One of the less intuitively obvious suggestions is to think carefully about whether all the potentially affected people need to be notified. For example, notifying all your customers about a security glitch which in reality affects only a small proportion of them may produce a flood of enquiries and requests for further information from unaffected people, as well as possibly undermining their confidence in your organisation.

What is advisable is to obtain an accurate understanding as soon as possible of the scale of the loss and the potential impact on the people whose personal information has been lost. For example, if the information is such as to make identity fraud a possibility, it is likely to be more important to notify the people concerned than if the lost information is simply a list of names and addresses (which could be obtained easily from other sources).

The ICO advises that there are four important elements to consider when creating a breach management plan. These are:

1. Containment and recovery;
2. Assessment of ongoing risk;
3. Notification of breach; and
4. Evaluation and response.

The guidance is recommended reading for any organisation which holds personal data and should be considered as part of your data risk management strategy. It can be found here.

See also the ICO’s good practice guides on data security management.

In 2008, the Financial Services Authority published its report on data security in financial services. The report contains much useful information and advice on the maintenance of good data security.

View the eight data protection principles.

Companies Act 2006 Overview

The Companies Act 2006 became fully effective from October 1st 2009.

Here are some useful sources of information on the Act. For more information and advice on your circumstances, contact us.

• Companies House Overview.
• Changes which came into effect from 1 October 2009.
• Changes Affecting Directors (which came into effect from 1 Oct 2007).