Article written by Barri Mendelsohn, Jenny Wilcock, Cassandra Ditzel and Daniel Jones
Last year was an interesting year in the UK Courts for businesses and corporate/commercial lawyers alike. Whilst we do not intend to provide you with an exhaustive list of all UK Court decisions, we have selected 9 key cases heard which are both thought-provoking and relevant to those who are not as close to the UK legal system and which could potentially affect you or your clients’ business. Some of the key findings are set out in the summaries below:
1. Choose your words wisely when you have an Automatic Email Signature…..
Whilst reflecting modern times, Neocleous v Anorhighlights the level of care that must be taken when negotiating contract terms over email. The UK Courts held that e-signatures can satisfy the formalities set out under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 and consequently found that a binding agreement had been created between the parties. With the UK Courts giving little significance to the type of technology used to apply a signature, with parties regularly negotiating over email or other electronic means it is best practice to ensure that wording, akin to “subject to contract”, is included in all pre-contractual communication in order to reduce risk of such communication being deemed a valid legal contract. Additionally, UK businesses need to ensure that those persons communicating any contract terms on behalf of a company have sufficient authority to do so, in addition to sufficient training to understand the risks of inadvertently entering into commercial contracts by virtue of email communication. The UK Courts delivered judgment on exactly this point in Athena v Superdrugat the beginning of this year where an employee held himself out to have the authority to discuss contractual terms and with insufficient training found his communication with a supplier to be legally binding.
2. Which came first, the binding contract or the implied term?…..
Two cases heard by the UK Courts in 2019 (Wells v Devani and Lehman Brothers International (Europe) (In Administration)) served as a helpful reminder that the best starting point for determining the parameters of a contract will often be the standard test of contractual interpretation instead of the high bar set when trying to persuade the Court to imply any terms into an agreement. The Courts appear to be reluctant to find an agreement too uncertain to be enforced when both conduct AND actions indicate a party’s intention for it to be legally binding. Additionally, UK Courts have shown a desire to uphold commercial contracts and take a pragmatic approach in implying or striking out terms of agreements (whether oral or otherwise), in order to make such contracts workable.
3.Don’t forget about the trustee body if seeking to rely on informal shareholders approvals….
Whilst a useful fallback option for approving corporate transactions by informal unanimous consent, the Duomatic principleis not without its limitations and it is not wise to invoke it in order to authorise transactions up front. The UK Courts apply a strict interpretation to the principle, particularly where trust or pension schemes are shareholders of a company. If decisions are significant, best practice for directors is to always follow the procedures set out under the articles of association and shareholders’ agreement (if any) of the company and/or the Companies Act 2006 in obtaining formal approval by the requisite shareholders needed in order to avoid the risk of any decisions being deemed invalid; and/or any claim being made that a director has breached any of his/her fiduciary duties.
4. Share purchase agreements:Lessons for Sellers…
Triumph V Primustested key areas typically disputed by buyers and sellers following an acquisition, namely, (a) “fair” disclosure and (b) warranties relating to forward-looking projections. As ever sellers need to take care when disclosing material to buyers. Whilst not best practice, it is generally accepted in the UK market to generally disclose the entirety of a virtual data room subject to the principal of “fair” disclosure. However, sellers should ensure that in order to meet the standard test of “fair” disclosure, an index of those documents is appended to the disclosure letter and a USB containing the contents of the data room is provided to the buyer prior to completion. With regards to forward-looking projections, whilst giving warranties of this nature should be avoided, if provided, sellers should ensure that such warranties do not relate to factual accuracy of the statements and are qualified by specific accounting standards and/or careful enquiry with management.
5. Buyers read the fine print when serving notices…
UK Courts have highlighted yet again the importance of drafting unilateral notices clearly and unambiguously. Parties should always consult the relevant provisions in the agreement before taking any action. As the buyer, in the Stobart Groupcase, had notified the seller of a potential claim relating to a tax liability, asking the seller if they wished to consult with HMRC in respect of the claim, the buyer believed this notice was sufficient to act a notice of a warranty claim under the SPA. However, the High Court and Court of Appeal found that it was not. The purpose of notice clauses in agreements is to provide certainty to the party being notified and a failure to adhere to these provisions can have fatal consequences. Whilst the buyer had provided notice to the seller, it was not notice of its intention to bring a claim against the seller in respect of the liability nor did the notice contain all of the requisite information set out under the SPA (which the parties had previously negotiated and agreed). With a disproportionate amount of litigation on this, the UK Courts are reluctant to look to a party’s subjective intent, relying solely on the express wording contained in the SPA and the notice.
6. Shareholders and directors: where basic procedures can trip you up …
Despite its usefulness in fostering business efficient and expediency, failure to adhere to basic statutory requirements set out under the Companies Act can render shareholder decisions passed by way of written resolution invalid. As general meetings enable shareholders to voice an opinion and vote, circulation of written resolutions by the company to all shareholders eligible to vote acts as a safeguard to ensure that the process for passing written resolution is not abused. Company directors need to collectively approve the form of written resolution and also ensure that all shareholders receive a copy of such written resolution (even if they do not end up voting on it). Shareholders should also bare in mind any error in circulation of written resolutions amongst each other can also, render the resolution (if passed) invalid.
7. You may have Third Party Rights even if you don’t know a contract exists:
The UK Courts are willing to uphold third party rights and apply a broad interpretation when deciding if a person falls under the Contracts (The Rights of Third Parties) Act 1999 (the “RTPA”). As a result care must be taken when drafting contracts to ensure that the operation of the RTPA is specifically excluded where there are no parties needing to benefit from the RTPA. Specifically excluding the RTPA enables a Court to see that parties intended for provisions of an agreement not to be enforceable in respect of third parties. In the Chudley case, despite not being a party to, or even being mentioned in, the contract and also not knowing that the contract existed, the Court of Appeal still found in favour of the third party claimants. The Court of Appeal made it clear that determining whether the requirements of the RTPA have been met will be a process of construction of the contract as a whole. Therefore, regardless of the number, parties should always consider whether they are any potential third parties who could make a claim under it.
8. The Supreme court sharpens the “Blue Pencil Test”for restrictive covenants: …
Restrictive covenants need to be clearly drafted so as to avoid any ambiguity if the wording is disputed and the provisions, can still remain enforceable if the disputed wording is carved or struck out. If parties consider the Blue Pencil Test and are sure that such restrictive covenants will pass it, disputes and challenges could be avoided altogether. Employers, whilst potentially getting two bites at the cherry in getting the drafting of covenants right whether at drafting or in the Court, need to be mindful that the reasonableness of such covenants will be assessed at the time it was entered into and not at the time the employer seeks to enforce it. If restrictions go further than what is necessary to protect the employers business interests at the relevant time, they could be deemed unenforceable as it is clear that the UK Courts continue to adopt a cautious approach to severance of post-employment restraints of trade.