In most litigation, evidence is everything. This is certainly true of passing off actions where, to succeed, the claimant must prove the classic trinity, namely a reputation and goodwill, a misrepresentation and consequential damage.
This article is concerned with the second of those elements, the misrepresentation, and one of the methods of obtaining the evidence necessary to establish it, namely test purchases or trap orders. Continue reading “Trap orders to establish passing off”
Apart from specific requirements imposed to minimise the chance of loss, the insurer may also insist on more general obligations, such as a clause requiring the insured to take reasonable care to avoid liability, loss or damage. Continue reading “Insureds’ continuing obligations through the policy period”
Since the introduction of the Insolvency Act 1986 (the 1986 Act), there has been a standard way of dealing with the leasehold premises of a company in administration as part of the sale of the business. Typically, the business sale agreement provides for the purchaser to occupy the leased premises on the basis of an informal licence.
The sale agreement places the onus on the purchaser to obtain the landlord’s consent to the assignment of the lease. It also provides that the consequence of this formal breach of the lease is to be at the risk of the purchaser alone. Continue reading “Administrators, landlords and tenants: three key cases”
In IHL169 we wrote of the effect of the House of Lords judgment in Transfield Shipping Inc v Mercator Shipping Inc [2008] (also referred to as The Achilleas), which cast some doubt on the application of the traditional rule on remoteness set out in Hadley v Baxendale (1854).
In short, Transfield found that types of loss arising from a breach of a commercial contract were not recoverable, even though reasonably foreseeable, if the parties did not intend the party in breach to have assumed liability for them when the contract was formed. This led to some confusion as to how Hadley was to be applied going forward and was of particular interest in the IT industry where liability is often a critical issue.
However, the recent Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] has considered the judgment in Transfield and has clarified the law in this area. Although a shipping case (like Transfield), the principles apply equally to IT contracts.
Sylvia Shipping Co, the owners of the vessel ‘Sylvia’ (the owners), chartered the vessel to Progress Bulk Carriers (the charterers) in an agreement dated 22 February 2000. The agreement was initially for two to four months, but was later extended. The last extension was dated 13 June 2003, under which the charter period was extended for a further period of 11 to 13 months, at the charterers’ option, at a hire rate of $5,900 per day.
On 11 March 2004, the vessel loaded with cargo in Anacortes, Washington, for discharge at Port-Alfred in Quebec. On 30 March, the charterers entered into a sub-charter with a company called Conagra for the carriage of a cargo of wheat from Baie-Comeau (in Quebec) to Casablanca, with a start date of between 14 and 22 April.
The vessel arrived at Port-Alfred on 14 April. On 15 April, a Port State Control (PSC) inspection was carried out, which found three structures in the holds to be wasted. Discharge and cleaning of the holds was completed on 16 April and, on the same day, the Canadian Food Inspection Agency rejected four of the vessel’s five holds for the loading of grain and grain products. In response, the owners appointed the contractors who had cleaned the holds to carry out descaling work.
On 19 April, the vessel arrived at Baie-Comeau. The holds were inspected again by the PSC and were found to still be unsafe. The PSC then issued a detention order due to structural wastage. Repairs were started and, on 22 April, Conagra cancelled the sub-charter.
The next day, the charterers entered into a substitute arrangement with York Ltd (York) for a one-time charter trip to Lome (in Togo), which was due to leave between 29 April and 3 May.
Hold repairs were accepted as complete on 26 April 2004 and the charterers were able to make the York arrangement. They subsequently brought a claim against the owners for the losses arising from not being able to complete the Conagra fixture (which had a higher value than the York fixture).
An arbitration tribunal found in favour of the charterers. It held that the owners had not exercised due diligence in ensuring that the steel work within the hold was suitably maintained and that, had the owners taken appropriate steps in time, the Conagra fixture could have been met by the charterers. As such, the tribunal considered the loss of the Conagra fixture to be a reasonably foreseeable result within the first limb of Hadley and awarded the charterers $273,706.12. This was the value of the Conagra contract (held to be worth $804,222.05) less the amount the charterers earned under the York contract over the number of days that the Conagra contract would have run for (calculated at $530,515.93).
The owners appealed, arguing that, pursuant to Transfield, loss of a sub-charter was too remote and that the recoverable damages were limited to the difference between the charter and the market rate during the period of delay.
Hamblen J, in finding in favour of the charterers and upholding the arbitration tribunal’s decision, gave a useful summary of the issues and judgments of the five law lords in Transfield, and concluded that there were two approaches taken.
The first, the orthodox approach, was taken by Lord Rodger and Baroness Hale, and followed the principles laid down in Hadley. The second, the so-called ‘broader approach’, was taken by Lords Hoffmann and Hope (and supported to some extent by Lord Walker, the fifth law lord), and this added another layer onto the traditional rules on remoteness. The question, they held, was not only whether the parties must be taken to have had this type of loss within their contemplation when the contract was made, but also whether they must be taken to have assumed liability for this type of loss.
Hamblen J held that Transfield had resulted in an amalgam of the orthodox and broader approaches. He stated that:
‘The orthodox approach remains the general test of remoteness applicable in the great majority of cases. However, there may be “unusual” cases, such as The Achilleas itself, in which the context, surrounding circumstances or general understanding in the relevant market, make it necessary specifically to consider whether there has been an assumption of responsibility.
This is most likely to be in those relatively rare cases where the application of the general test leads or may lead to an unquantifiable, unpredictable, uncontrollable or disproportionate liability, or where there is clear evidence that such a liability would be contrary to market understanding and expectations.
In the great majority of cases it will not be necessary specifically to address the issue of assumption of responsibility. Usually the fact that the type of loss arises in the ordinary course of things or out of special known circumstances will carry with it the necessary assumption of responsibility.
The orthodox approach, therefore, remains the “standard rule” and it is only in relatively unusual cases, such as The Achilleas itself, where a consideration of assumption of responsibility may be required.’
Hamblen J was keen to stress that there was no new generally applicable legal test on remoteness in damages. It has, according to his judgment, been argued on several occasions recently, and has resulted in confusion and uncertainty.
Although not the first case to consider the application of Transfield, this judgment is a useful summary of its application going forward and gives comfort that the broader approach taken by Lords Hoffmann and Hope (and supported by Lord Walker) will only apply in very limited circumstances.
In IHL169, we suggested that it would be dangerous for suppliers to rely on Transfield as customers and suppliers, and the courts, have never doubted that all reasonably foreseeable losses that are not expressly excluded are recoverable. Further, in IHL179, we noted that an argument based on Transfield in GB Gas Holdings Ltd v Accenture (UK) Ltd & ors [2009] had been rejected on similar grounds.
The judgment in Sylvia Shipping confirms that the traditional approach to remoteness, as per Hadley, will apply in all but the most exceptional of cases. It seems, therefore, that the rule set out over 150 years ago remains alive and well.
Indian Legislature has ostensibly put into place a cohesive structure for alternative dispute resolution (ADR) mechanisms, primarily through the Indian Arbitration and Conciliation Act 1996 (the 1996 Act). The 1996 Act is wide in its scope and within its ambit covers arbitrations, as well as conciliations.
India, however, is still not a preferred destination for the conduct of arbitrations and it is only when one or both parties are based in, or operate out of, India that the country is chosen as a seat of arbitration. This lack of preference expressed by the global business community essentially arises out of sweeping powers that the Indian judiciary has assumed, taking shelter under the garb of seemingly innocuous statutory provisions. Continue reading “Proposed amendments to arbitration law in India: implications and effect”
The introduction of the Points-Based System (PBS) in November 2008 was the biggest change to UK immigration law for 45 years. Since the introduction of the PBS, the UK Border Agency (UKBA) has sought to re-align responsibility for non-European Economic Area (EEA) nationals from the UKBA to UK employers and the migrants themselves.
With the PBS came the concept of the ‘sponsor’ within UK immigration. Under current rules employers who wish to offer roles to non-EEA nationals (who don’t have prior work authorisation) must apply for a sponsor licence. The process of applying for a licence requires employers to submit detailed information and several supporting documents to the UKBA. These documents are then graded. The UKBA makes a decision whether to issue the UK employer with ‘A-rated’ status, ‘B-rated’ status or to refuse outright the employer’s sponsorship licence application.
Primarily, for a sponsor licence to be issued, the UKBA must be satisfied that the employer is able to take responsibility for ensuring that the non-EEA national has the correct work authorisation (through legal right to work checks) and will comply with the numerous sponsorship duties.
When migrants work in the UK without permission to do so, the UKBA will impose a range of penalties on those who employ people illegally. Employers who have been issued with a sponsorship licence (and those who haven’t) should make sure that migrants who are not settled in the UK are entitled to live and work here. This is usually completed through legal right to work checks.
Prior to the introduction of the Tier 2 scheme (previously the work permit scheme) the Immigration, Asylum and Nationality Act 2006 (the 2006 Act) came into effect. The 2006 Act strengthened the requirement for employers to check documents to establish a person’s eligibility to work in the UK. Along with the 2006 Act, new civil penalties were introduced with fines of up to £10,000 for each illegally employed worker, and unlimited fines and imprisonment of up to two years for knowingly employing illegal workers.
Employers are therefore required to check eligibility to work in the UK for each new starter before they commence employment. Employers must obtain copies of prospective employees’ work authorisation and should ask all candidates to bring proof of their right to work to interviews for employers to check and take a copy. This check should then be completed on an annual basis.
Once a UK employer has been issued with a sponsor licence, if a sponsor employs a migrant without entitlement to work in the UK, the UKBA will either suspend, downgrade or withdraw a sponsorship licence. The UKBA has not listed all the circumstances in which they will suspend, withdraw, downgrade or take no action. The UKBA will consider:
The UKBA will downgrade a sponsor from an A rating to a B rating if the UKBA issues the sponsor with a penalty for an offence listed in Appendix C of the full sponsorship policy guidance (these are offences under the Immigration Rules) (unless the UKBA withdrew the penalty or cancelled it on appeal, it will withdraw the licence if the sponsor is issued with a maximum civil penalty). The UKBA will also downgrade a sponsor if the sponsor has certified that a migrant will not claim state benefits and that migrant then does claim benefits with the UK employer’s knowledge.
In addition, the UKBA may also downgrade a sponsor from an A rating to a B rating if the sponsor assigns a certificate of sponsorship saying that a job was on the shortage occupation list and it was not, and/or any of the sponsor’s level 1 or level 2 users disclose their sponsorship management system password to another person.
If the UKBA decides to downgrade a sponsorship licence, the UKBA will amend a sponsor’s entry on the online register of sponsors. The sponsor will still be able to issue certificates of sponsorship as a B-rated sponsor but the sponsor is unable to guarantee the maintenance requirement for migrants (this is the requirement that non-EEA nationals must have at least £800 available (with £533 per dependant) for 90 consecutive days prior to an application for entry clearance). Sponsors will also be given a 12-month action plan to implement changes to their HR practices. While the action plan is implemented, sponsors will receive several compliance visits from the UKBA enforcement and compliance teams, and the sponsor may receive further scrutiny in relation to business visitors.
Once the UKBA has issued a letter downgrading a sponsor, the sponsor will have 28 days to submit a written response. The sponsorship licence will be suspended until a decision is made by the UKBA on the sponsor’s status.
In these circumstances, sponsors will be suspended in all the tiers, categories and sub-categories in which they are registered. The UKBA will also remove a sponsor’s entry from the online register of sponsors. The sponsor will not be able to issue any certificates of sponsorship while it is suspended, but sponsors must still comply with all the sponsorship duties for the migrants they currently sponsor. If the suspension is lifted, the UKBA will reinstate the sponsor’s name on the online register with the rating awarded.
If the UKBA finds that sponsors have assigned a certificate of sponsorship to a migrant during their suspension, the UKBA will take further action against the sponsor. The UKBA will initially refuse the migrant’s application, on the basis that their certificate of sponsorship is invalid. Migrants who are already being sponsored at the time of the suspension will not be affected, unless consideration of the case leads the UKBA to withdraw the sponsor licence.
Sponsors will lose their sponsorship licence if the sponsor:
The UKBA will also withdraw the sponsorship licence if the sponsor:
Sponsors will normally have their sponsorship licence withdrawn if the sponsor or another relevant person is convicted under the following legislation (unless it is a spent conviction under the Rehabilitation of Offenders Act 1974):
Licences can also be withdrawn under any offence relating to trafficking for sexual exploitation or any other offence that shows that a sponsor poses a risk to immigration control.
Sponsors will also normally lose their sponsorship licence if they, or another relevant person, are dishonest in any dealings with the UKBA. This includes, among other things:
Sponsors will also normally lose their sponsorship licence if:
In addition, a sponsorship licence may be withdrawn if a sponsor fails to comply with any of its duties and the UKBA is not satisfied that the sponsor is using the processes or procedures necessary to fully comply with its duties. The sponsorship licence may also be withdrawn if:
If the UKBA withdraws a sponsorship licence, it will:
If the migrant has less that six months permission to stay left, the UKBA will not reduce the length of their permission. Finally, if the UKBA immediately ends the permission to stay, the migrant will have to leave the UK or face enforced removal.
UK employers have considerable duties and responsibilities under the PBS regime. It is therefore of paramount importance that employers take all steps necessary to comply with their responsibilities in relation to employing non-EEA nationals. In addition to seeing a sponsorship licence suspended, downgraded or withdrawn, employees who have the responsibility for the sponsorship licence could face several additional penalties under the Immigration Rules.
In conclusion, employers should make sure that their HR practices are fit for purpose so that they don’t fall foul of the many continuing obligations.
In February 2010 the Sentencing Guidelines Council (the SGC) issued definitive guidelines to courts on imposing appropriate sentences for corporate manslaughter and health and safety offences causing death. The SGC states that fines imposed on companies found guilty of corporate manslaughter should not fall below £500,000, while fines in respect of health and safety offences that are a significant cause of death should be at least £100,000. Crucially, the SGC declined to provide for a fixed link between the imposed fine and the turnover or profitability of the offending company.
The guidelines were issued two weeks before the scheduled start of the UK’s first corporate manslaughter trial. An engineering consultancy firm, Cotswold Geotechnical Holdings, was charged pursuant to the Corporate Manslaughter and Corporate Homicide Act 2007 in relation to the death of an employee who died when a trench collapsed on top of them as they collected soil samples. Company director Peter Eaton has also been charged with the common law offence of gross negligence manslaughter. If found guilty, the maximum sentence that Eaton faces is life imprisonment, while the company may be subject to an unlimited fine. The case has been adjourned and it has been reported that the hearing may not commence until autumn 2010, but commentators will closely watch the eventual trial with interest to see how courts apply the new law and, if relevant, the guidelines laid down by the SGC.
The offence of corporate manslaughter:
While most other offences covered by the guidelines will concern breaches of s2 and s3 of the Health and Safety at Work etc Act 1974, all relevant offences:
There is clearly an overlap between corporate manslaughter, and health and safety offences that cause death. However, corporate manslaughter will be committed where there is both a gross breach of a duty of care and failings of senior management in the way that the business is run from a safety perspective. These cases will therefore generally involve systemic failures. Health and safety offences, by contrast, are committed where the accused company cannot show that it was not reasonably practicable to avoid a risk of injury or lack of safety. The failing will therefore be operational as opposed to systemic and may well involve instances of minimal failures to reach the standard of reasonable practicability rather than a ‘gross breach’ of a duty.
Significantly, there is a difference in the operation of the burden of proof in respect of each category of offence. In cases of corporate manslaughter, the prosecution have the burden of establishing all elements of the offence. When dealing with a health and safety offence causing death, the prosecutor need only prove that there has been a failure to ensure safety (which is often established simply by pointing to the fact that a death has occurred). The burden then shifts to the defendant to establish that it was not reasonably practicable to do more than was done to comply with the relevant duty.
The guidelines set out ten stages to be applied by courts in deciding the sentence to be imposed on convicted companies:
Given that death is involved, the offence will be self-evidently ‘serious’. The level of seriousness will be determined by the judge following consideration of such factors as:
The SGC sets out a non-exhaustive list of aggravating factors in its guidelines, including:
A second, similarly non-exhaustive list is set out in the guidelines in respect of mitigating factors. These include:
It could legitimately be noted that a company convicted of any health and safety offence is already required to make efforts to remedy any defect in its practices, and is obliged by law to take a ‘responsible’ attitude to its duties in this regard. It is therefore suggested that courts will require that company to exceed the requirements of law for its past record and response to the offending incident to be taken into account as a mitigating factor.
The third stage involves an examination of the defendant’s means. Initial proposals suggested that the SGC would seek to link the level of fine imposed with the offending company’s annual turnover. The guidelines reject this proposal on the grounds that it is ‘not appropriate’. In the course of the consultation on the draft guidelines, the chair of the SGC, Lord Chief Justice Judge, said that the fixed link to turnover:
‘Could inadvertently risk an unfair outcome, was particularly difficult to apply to public and third sector bodies, was likely to create a perverse incentive to adjust corporate structure to avoid the proper consequences of offending and so did not provide the most effective way of assessing the level of fines across such a wide range of situations.’
However, the guidelines do state that ‘a wealthy defendant should pay more than a poor one’ and that the fine should ‘inflict painful punishment’. This is subject to the caveat that the fine should be set at a level that the defendant can afford to pay, even if it takes several years.
The obligation to provide the requisite financial information falls on the defendant. The court is permitted to draw the appropriate adverse assumptions as to the organisation’s means if the defendant fails to comply with this obligation. The court should review three years of financial information (including the year of the offence) in assessing the appropriate fine.
A court should take into account the consequences of the imposition of a given fine on the defendant. The relevant factors to consider include:
The guidelines also stipulate that certain factors will not normally be relevant, including the effects on shareholders, the effects on directors, the possibility of a company increasing the prices it would normally charge in response to the fine, the liability for civil compensation and the cost of complying with a remedial order.
Large organisations will be required to pay a fine within 28 days, whereas smaller or ‘financially stretched’ entities can spread payments over a much longer period.
If a defendant makes a quantifiable saving through the commission of the offence, courts are instructed to ‘ensure that the fine removes the profit and imposes an appropriate additional penalty’.
The SGC appreciates that the application of the guidelines listed above will result in a broad range of fines being imposed. However, in effect, the guidelines provide a starting point for courts to bear in mind when arriving at the appropriate fine.
It is stated that an appropriate fine for corporate manslaughter offences will ‘seldom be less than £500,000 and may be measured in millions of pounds’, while where a health and safety offence has been a significant cause of death, the fine should not fall below £100,000 and may reach ‘hundreds of thousands of pounds or more’.
Reductions to be made in respect of a guilty plea made by the defendant should then be accounted for.
There are four additional orders that could be imposed on a convicted defendant in conjunction with the fine.
If a court makes a publicity order, it should stipulate in which medium a public announcement should be made and should consider requiring a statement to be displayed on the company’s website. A newspaper announcement should not be ordered if the trial has received sufficient media coverage, but, where necessary, the order will specify the publication, form of announcement and number of insertions of the required announcement. In certain cases, the court may order the size of the announcement and may specify that any related comment from the company is separated from the announcement itself. The prosecution will provide the court (and serve on the defendant) a draft copy of the suggested order, which the judge should then personally endorse.
The decision by the SGC to reject a fixed link between a defendant’s annual turnover and the calculation of the appropriate fine to be imposed on it has been criticised by commentators. It has been suggested that a large multinational convicted of corporate manslaughter may now face fines representing less than 1% of its global profits, which may not be an adequate incentive to ensure that its systems and procedures sufficiently protect its employees and the general public.
There also appears to be inherent ambiguity within the guidelines. They provide that fines for corporate manslaughter will ‘seldom be less’ than £500,000, but the fine imposed should not have the effect of putting the defendant out of business. This will create difficulties for a court considering the fine to impose on a small company found guilty of the offence (such as Cotswold Geotechnical Holdings), since a fine of £500,000 would almost certainly be fatal to the continued existence of such a business. While the SGC’s guidelines clearly allow a court to use its discretion to reduce the fine below the threshold in such circumstances, this does raise the question of how useful the stipulated benchmarks will actually prove to be in practice. As a result, the progress of the case against Cotswold Geotechnical Holdings will be subject to close scrutiny as practitioners observe the practical application of the guidelines (and the associated law) for the first time.
The Waste Batteries and Accumulators Regulations 2009 (the 2009 Regulations) are the latest piece of legislation to come into force in the UK deriving from the European producer responsibility legislation. The staged implementation of the 2009 Regulations is now complete and the final obligations came into force on 1 February 2010.
The Regulations are based on similar principles to previous legislation, such as the Waste Electrical and Electronic Equipment Regulations (WEEE) 2006 and the Producer Responsibility Obligations (Packaging Waste) Regulations 2007. Obligations are placed on the producers of items placed on the market to take responsibility for the environmental cost of these items and complex mechanisms are put in place with obligations on others (such as distributors) to ensure that this happens. Continue reading “Waste batteries and accumulators, environmental regulation and supply chains: the big picture”
An improvement in the liquidity of banks, as well as the need for an additional injection of money, became crucial for Ukrainian banks in the aftermath of the recent global financial crisis. An increase in the number of non-performing loans (NPLs) negatively impacted the overall liquidity of Ukrainian banks by forcing them to hold mandatory reserves.1
By removing their NPLs, banks are able to release reserves set aside in connection with these NPLs and thereby raise money. Therefore, the sale (or other form of disposal) of NPLs represents an attractive instrument for the reduction in the number and volume of NPLs, and the recapitalisation of the bank’s liquidity. Continue reading “Legal and tax treatment of the sale of non-performing loans in the Ukraine”
It was hardly surprising and perhaps inevitable given the current economic and financial crisis, coupled with a general election, that the government would attempt to find ways to raise funds to repay the public debt, without adversely affecting the majority of voters. One such method devised by the Labour government was to restrict tax relief on contributions to registered pension schemes, with effect from 6 April 2011, for high-income earners.
The Labour government introduced legislation in the Finance Act 2010 to restrict the tax relief for those people with pension savings, and for those who have a gross income of £150,000 and over. Relief will be tapered away so that for those earning in excess of £180,000, it is worth only 20%, the same as to a basic rate taxpayer. This means that individuals affected by the restriction will continue to receive at least basic rate relief on all pension contributions (subject to the existing annual and lifetime allowances).
Prior to the election, the government released draft technical guidance that explains the key elements of the legislation and how to calculate the high-income charge relief. It is expected that the draft guidance will be incorporated into the technical pages of HM Revenue & Customs (HMRC)’s Registered Pension Scheme Manual following the end of the consultation period. This article aims to provide an overview of the main provisions of the new legislation and draft guidance, while briefly considering the rationale for imposing such a restriction and the interim measures that have been introduced that will apply until the new legislation commences.
The Labour government stated in the Pre-Budget Report (PBR) 2009 that generous tax relief is provided to promote greater independence and wellbeing in later life, in recognition that pensions are less flexible than other forms of saving and to encourage support from employers. According to the consultation document released at the same time as PBR 2009, tax relief on pensions was estimated to be worth around £28.4bn (2% of GDP) in 2008/09.
To justify the proposed restrictions on pension relief for high earners, the government argued that its aim was to deliver a system of pensions tax relief that is fair, affordable and sustainable. According to recent government estimates, the cost of pensions tax relief in the UK has doubled over the past decade and the proportion of tax relief going to those on the highest incomes has risen at a remarkable rate. In the Labour government’s view, which was supported by their calculations, pensions tax relief currently disproportionately benefits those on the highest incomes, with around a quarter of the tax relief on pension contributions going to individuals with incomes of £150,000 and over in 2008/09, although such contributors only consist of approximately 2% of pension savers.
The restriction will therefore only apply to about 300,000 individuals who constitute about 2% of pension savers or around 1% of working-age taxpayers who currently benefit from around a quarter of the tax relief provided on pension contributions.
Naturally enough, Gordon Brown’s government was not going to risk high-income earners making large increased contributions or increasing their benefits to take advantage of the higher tax relief before the new provisions take effect in April 2011. Therefore, to prevent certain individuals from substantially increasing their pension contributions in the period between the announcement and implementation of the restrictions on pension relief, the Budget 2009 introduced an anti-forestalling regime, which took immediate effect.
The broad effect of these anti-forestalling rules introduced in the Finance Act 2009 was to allow high-income earners to continue arrangements already in place on 22 April 2009 (budget day) under the current regime, but to ensure that any higher tax relief on any additional pension savings or pension accrual effected after budget day will be clawed back.
As of 6 April 2011, tax relief on pension savings will be restricted for those on incomes of £150,000 or more and will be gradually tapered down so that for those on incomes of £180,000 and over the tax relief will only be worth the same as it is for a basic rate taxpayer (ie 20%).
This means that individuals affected by the restriction will continue to receive at least basic rate relief on all pension contributions (subject to the amount of the individual’s relevant UK earnings, and the existing annual and lifetime allowances that have been set at £245,000 and £1.75m for the 2009/10 year, respectively).
Tax relief is restricted by a ‘high income excess relief charge’ (HIERC). Tax relief is given on any pension contributions in the normal way and will continue to be so, eg through the net pay arrangement or relief at source. The HIERC has the effect of reducing the rate of tax relief given on pension savings to the basic rate of tax and the payment of the HIERC by the affected individual is undertaken through the current self-assessment regime.
The HIERC is a charge to income tax on those individuals who have:
The individual is liable for the charge whether or not they and the pension scheme administrator concerned are UK resident, ordinarily UK resident or domiciled in the UK.
The calculation of the HIERC appears to be overly complicated and detailed and this is evidenced by the fact that the recently released guidance requires over 70 pages to explain how the charge is to be ultimately calculated. The draft guidance uses a four-step process to explain how the charge is calculated. This methodology has been followed in this article.
To calculate the HIERC, the following four steps should be followed.
Relevant income is income after deductions, except for pension contributions and charitable donations, plus any relevant salary sacrifice amount entered into after 21 April 2009. Employer’s pension contributions are not taken into account in the calculation of an individual’s relevant income.
If the individual has a relevant income of less than £130,000, the HIERC will not apply.
Gross income is income after taking account of any deductions, except for pension contributions and charitable donations, plus the total pension savings amount, less any personal contributions. Gross income includes both the personal and employer pension contributions to registered pension schemes.
If the individual has gross income of less than £150,000, the HIERC will not apply.
A component of an individual’s gross income is the total pension savings amount and it is therefore necessary to determine this amount. The total pension savings amount, for any tax year, is the total of all the individual pension savings amounts for each arrangement relating to that individual under a registered pension scheme of which they are a member. The total amount will be dictated by the particular type of arrangement and, given the complexity of the rules, it would be impossible to adequately summarise the different calculations in this article. However, the individual amounts are broadly measured at arrangement level, using a method that depends on the nature of the particular arrangement (ie hybrid arrangements, money market arrangements, cash balance arrangements or defined benefit arrangements).
The restriction of the relief is applied by clawing back the relief given on an individual’s tax return. The HIERC is determined by multiplying the total pensions saving amount by an ‘appropriate rate’.
The ‘appropriate rate’ in relation to the total pension savings amount for a tax year is:
‘Reduced net income’ for these purposes is the amount determined after step three of s23 of the Income Tax Act (ITA) 2007, which is broadly:
For individuals with a gross income above £180,000, the appropriate rate is 30%. In those circumstances, where the individual’s gross income for the tax year is less than £180,000, the percentages at ii) and iii) above are each reduced (but to no less than 0%) by 1% for every £1,000 by which it is less than £180,000.
The actual tax is charged on an individual’s ‘total pension savings amount’. Therefore, once the appropriate rate of the charge has been determined, this should be applied to the pension savings amount to calculate the high-income excess relief charge.
As it seems with each new reform proposed by HMRC, targeted anti-avoidance rules will also be introduced with the new legislation. Broadly, these rules will apply in circumstances whereby a scheme is in place that seeks to reduce the member’s gross or relevant income, or their total pension savings amount, which is replaced with some other benefit, or such reduction is redressed by an increase in their income or pension savings amount in a different year.
In circumstances where it is found that a scheme exists that is devised to avoid the HIERC, the individual will be treated as if the gross income for the tax year and total savings amount for the tax year were what they would have been in the absence of such a scheme.
With the introduction of the 50% income tax rate from 6 April 2010 and the abolition of personal allowances for high earners from the same date, the generous tax relief currently afforded to all individuals was never going to survive in the current economic climate. With the Labour government’s assertion that high-income earners (ie those earning in excess of £150,000) representing about 2% of all pension savers receive a quarter of all tax relief on contributions, it is easy to see why the restriction was introduced, particularly with the recent general election.
However, the new rules appear to be overly complex, and have been widely criticised by advisers and the business community in general. It is likely that the new rules will result in significant compliance costs for those affected individuals, and these new rules do little to improve the UK as being an attractive place for highly skilled individuals to work and reside. Perhaps it would have been a better and easier solution for Brown’s government to simply reduce the amount of the annual allowance or lifetime allowance, which are both very generous in comparison to some other jurisdictions?
The Carbon reduction commitment Energy Efficiency Scheme (the CRC) became effective on 1 April 2010. A full review of this has already been included in IHL179. However, the CRC will have important consequences that need to be considered by corporate lawyers and, in particular, in relation to corporate transactions, such as M&A and private equity investments, as well as restructuring and group reorganisations. This article will provide a brief overview of the CRC, and consider some of the corporate issues and how these can be addressed in corporate transactions.
UK legislation and policy are increasingly setting a trajectory for transition to a low-carbon economy. In the future, a business’s energy performance and strategies may therefore increasingly become indicators of value, particularly if the cost or risk profile of fossil fuels increases and the CRC, and other mechanisms, reveal the extent of a business’s dependency on fossil fuel. Where companies qualify for the CRC, their compliance with and performance within the scheme will also be a matter of public record, and will therefore be open to public scrutiny. Reputational risk will be an important consideration.
The CRC applies UK-wide to create a cap and trade scheme for emissions allowances, which is designed to reduce non-domestic, non-transport energy consumption. Participation is mandatory for around 5,000 of the large, but non-energy-intensive, private and public sector organisations. Examples of likely participants include banks, retailers, institutional landlords, data centre owners, private equity funds, large joint ventures, private finance initiatives, public-private partnerships, franchises, government departments and local authorities. Private sector participation will be based on groupings determined by share ownership or control. Foreign entities with an operation in the UK could also be caught. Another 20,000 organisations who do not qualify for CRC participation will be required to make certain information disclosures.
CRC will operate in phases. 2010 to 2013 is the first and introductory phase. Subsequent phases, each of seven years, will run to 2043.
An organisation must participate in a phase if, in a phase’s qualifying year, the organisation:
The qualifying year for the first phase is 2008 and for the second phase the year commencing April 2010. There are also certain reporting-only requirements for organisations with usage of between 3,000 MWh and 6,000 MWh, although these organisations would not be required to participate in the CRC.
CRC will seek to drive down energy consumption by:
This is all backed by stiff civil and criminal penalties for non-compliance. Members of a CRC group will have joint and several liability for CRC compliance.
Investments (eg equities, assets, joint ventures) may bring investors within the CRC’s first or subsequent phases with all attendant obligations, risks and opportunities.
For landlords and tenants, where the tenant has the energy contracts for the building then it will be responsible for the building’s emissions. However, in multi-let buildings, the landlord often has the energy contracts and so will have the emissions responsibility. It will want to look to its tenants to contribute towards any costs, but mechanisms may not exist to allow recovery. The CRC (and other mechanisms focusing on energy and sustainability) will create new tensions in landlord and tenant relationships, as well as additional reasons to collaborate – and not just on a voluntary short-term basis (particularly as there are innumerable existing leases with years to run).
Those involved with developments may find that the energy consumed during construction affects their own or the landowner’s CRC qualification and/or performance. This may need consideration in the building and/or development contracts. The owner or investor and user will have their own concerns as to energy sources and consumption of the final product.
The following paragraphs outline some of the issues that will already need to be considered in relation to company law and corporate transactions. However, as 2010/11 is the first year of the CRC, how these issues play out in practice and what additional issues become significant will only emerge over the first few years of the operation of the CRC.
It will be each organisation’s responsibility to assess whether they qualify for the CRC and which entities within that organisation’s group form the CRC group for the purposes of the scheme. It will be the relevant CRC group’s usage of qualifying electricity that will be aggregated, and will be the subject of the reporting and assessment requirements under the scheme.
For CRC purposes, a CRC group is defined by reference to the meanings of ‘parent undertaking’ and ‘subsidiary undertaking’ in s1162 of the Companies Act 2006 (the 2006 Act) (although note that the CRC Order includes unincorporated associations that carry on charitable activities within its definition of ‘undertaking’).
Each group will have a primary member (also known as the account holder) to act on behalf of the group. Commonly, the highest parent undertaking of a group (that is, the undertaking that is not a subsidiary undertaking of any other) will be the primary member of the group with whom the administrator of the scheme (in England and Wales, the Environment Agency (EA)), will liaise.
Where a group contains a significant group undertaking (SGU) that qualifies for the CRC on its own (including its subsidiaries), the SGU can be disaggregated from the rest of the group, provided that doing so does not cause the parent undertaking and the remainder of the group to fall below the 6,000 MWh qualification threshold. Furthermore, the SGU must consent to the disaggregation and register as a participant in the CRC in its own right. To disaggregate for CRC’s first phase, the whole group must register before 30 June 2010, identify the SGU(s) that consent to be disaggregated and obtain EA approval. The SGU(s) must then register as a CRC participant before 30 September 2010. Where an SGU has been disaggregated, it will be treated as a separate participant and will be required to comply with the same obligations as any other participant. This means that it will not be jointly and severally liable (see paragraph below headed ‘Joint and several liability’) with the remainder of the group, for the group’s liabilities under the CRC.
Therefore, when approaching corporate transactions that will involve acquiring or transferring certain subsidiaries out of a larger group, full investigation should be made into where those subsidiaries sit within a CRC group and, in particular, whether any of the subsidiaries are the primary member for any SGU. The buyer’s CRC status will also be relevant. There are also notification requirements when members of a CRC group leave the group or new members join. The notifications need to be made to the relevant administrator (the EA in England and Wales) within three months of completion of the transaction.
Under the CRC, each member of a CRC group will have joint and several liability for the obligations of the group under the CRC.
The EA has indicated that it intends to pursue the primary member first and foremost to recover any unpaid fines or other sums from that party, but has not discounted the possibility of pursuing other group members if this did not work.
As noted above, the CRC allows for SGUs to be disaggregated, which will enable commercially distinct divisions within larger organisations to be insulated from each other’s CRC liabilities. However, it should be noted that a head office function or holding company, which by itself does not meet the qualification criteria, will not be able to exclude itself completely from the scheme and will be included in the CRC group or have to aggregate itself with one of the SGUs within its group. This is a significant concern that the private equity industry has with the CRC scheme, as private equity funds would, as things stand, be aggregated with their investee companies for the purposes of the CRC.
Where participants are being acquired or split out from a group under a corporate transaction and these do not constitute distinct SGUs, the issue of joint and several liability will be an important one to address in the documentation relating to the transaction that is considered below.
While CRC is unique to the UK and catches only energy supplies in the UK, overseas undertakings (even without direct UK energy consumption) may be caught due to grouping rules and so will be jointly and severally liable with the rest of its CRC group, forming the participant. Non-UK driven organisations with UK consumption or subsidiaries with UK consumption will need to investigate their CRC position.
If the highest parent undertaking is an overseas company of a CRC group, it must nominate a UK-based subsidiary undertaking to fulfil that role (or, where no such subsidiary undertaking exists, such as where the UK energy consumption takes place in a branch, it will have to nominate a third party UK-based representative).
CRC participants will have to produce a footprint report for each CRC phase. In summary, a footprint report identifies all non-transport, non-domestic sources of emissions (including those covered by the EU Emission Trading System and the Climate Change Agreements). April 2010 to March 2011 will be the subject year for this first phase of CRC.
Participants also have to produce an annual report, which must be submitted by the last working day of July in each year. The CRC annual report is a different and separate requirement to an entity’s existing annual reporting requirements (though there may be some overlap with the business review requirements under the 2006 Act), and is therefore not linked to a company’s annual accounting reference date.
The CRC annual report will be used to identify the extent that a participant has been reducing its emissions compared to previous years and will be the source of information for determining the participant’s position in the annual league table, showing how participants have performed in the CRC and so determining the amount of a participant’s recycled payments. The league table will be publicly available and will contain certain information from the reports submitted by participants (for example the total carbon dioxide emissions from the annual report).
It should also be noted that, in addition to its reporting obligations, participants are obliged to keep records of the information on which the reports are based (an evidence pack). The evidence pack will need to be audited and certified by a person exercising management control of the participant. A participant will need to send the administrator its evidence pack if it is selected for an audit.
This reporting and record-keeping burden should be a significant focus of due diligence when assessing an undertaking for acquisition or, indeed, preparing it for sale.
The statutory directors’ duties, which were codified under the 2006 Act, include in s172(1)(d) the requirement for directors, in performing their duties, to have regard to (among other things) the impact of the company’s operations on the community and the environment.
The CRC also seeks to use reputation risk as a lever to drive down emissions by publishing the league tables showing the participants’ relative performance. Directors should therefore assess this reputational risk against their overriding duty under s172 of the 2006 Act to promote the success of the company.
As the CRC will give a clear indication, as published in the league table, of a company’s performance with regard to emissions, any failures, or even perceived failures in this area, will bring a much greater focus on the extent to which directors have discharged their statutory duties generally in this area and, in particular, under s172(1)(d) of the 2006 Act.
The need to buy and annually surrender sufficient allowances to match a participant’s emissions for the year, coupled with the timing of the recycling of money collected on the government’s sale of allowances, will mean that there is a time gap between the time of buying allowances and receiving the ‘recycling repayment’. For poor performers (and/or possibly some good performers who bought high in the secondary market) there will also be the shortfall in the amount expended compared to the amount received back since the amount of recycling payment is determined by a participant’s position in the annual league table.
This requirement to buy, ability to trade on a secondary market and surrender allowances each year, will need to be co-ordinated for the members of the participant’s group. Corresponding budgets, costs and targets will be allocated to members. Participants will also need to check that there are no governance or finance restrictions affecting the allowance trading (for example floating charges may cover allowances).
There are several tools within the legal framework of corporate transactions that can be deployed to identify and remedy any deficiencies in this area. These will be familiar to those accustomed to M&A transactions but it will be useful to consider these briefly in the context of the CRC. The summary below relates to M&A transactions, but the concepts are equally applicable to investments where the purchaser is the investor and the vendor is the target company, management or shareholders.
Environmental due diligence has tended to be more relevant to industrial or manufacturing deals. The CRC cuts across all business sectors. In the future, any business acquisition will require an assessment by the purchaser of whether the CRC applies.
Where a purchaser believes the CRC may be applicable to a target company or group, it should commission a specific CRC due diligence report (that is in addition to an environmental due diligence report otherwise required).
From the vendor’s perspective, it will need to make sure that its evidence pack and other record-keeping is in order, as well as the group accounting in relation to the payments and receipts under the scheme. With regard to the latter, these are all administered at the level of the primary member, which will need to make the appropriate allocations to its group. A purchaser will be interested to make sure that the target has not been unfairly allocated. Consideration will also need to be given as to whether allowances (an asset) are also to be transferred and at what price.
While due diligence ought to identify the risk areas and provide recommendations on how these risks can be addressed, a purchaser will typically require, in addition to the due diligence, full warranty coverage under the sale and purchase agreement. The warranties can be supplemented to address specific risks identified in the due diligence report to provide additional coverage. So, as the CRC scheme begins to mature, warranties in respect of the CRC would be expected to underpin, inter alia, a participant’s reported carbon emissions and corresponding claims for allowances. If, after the sale, it emerges that a participant has under-reported its emissions, the purchaser may have a claim against the vendor for breach of warranty. As there is likely to be reputational damage suffered in addition to the direct financial loss due to the public nature of the scheme, claims for damages for loss of reputation are likely to be significant.
Warranties may also be used to flush out any information that the purchaser suspects has not been forthcoming during the due diligence phase. By targeting the warranties on certain aspects or by specific information requests in the warranties, the purchaser can seek formal disclosure in the transaction documentation on areas of concern.
Where specific liabilities have been identified in the due diligence process, the purchaser will want to seek indemnities to ensure maximum recovery. Where remedial action is required by the vendor, this can be sought through undertakings contained in the sale and purchase agreement. Remedial undertakings on the target company will more likely be a feature of private equity investment transactions or joint ventures.
With regard to the issue of joint and several liability, where a participant is acquired out of a CRC group, the purchaser will want to seek an indemnity from the vendor (and arguably the primary member and all other entities) that may be liable with the target company, to ensure that the target company has a clean break from its previous CRC group.
The modernisation of business practice dictates that companies need to adapt quickly to their business environments. As a result, parties to long-term contracts may need to change or modify their contractual rights for them to have a continued commercial effect. This can be done in one of two ways.
One option is for the parties to consent to the termination of the original contract and enter into an entirely new one. Thus, all of the contractual rights of the parties under the original contract will cease and the parties will only be able to rely on the rights as governed by the new contract. However, this can be expensive, time consuming and impractical. Where large and complex commercial contracts are involved, the parties will often only wish to change a certain number of terms, while keeping the majority of original terms in existence. In this situation, it is far more suitable to vary the existing contract to give effect to the new commercial needs of the parties.
However, as the recent BMS Computer Solutions Ltd v AB Agri Ltd [2010] demonstrates, ill-thought out variations can lead to unintended consequences.
Under the terms of a licence agreement between the parties, BMS granted a software licence to AB Agri for a period of ten years (the licence agreement). The parties simultaneously entered into a support agreement that granted AB Agri the right to technical support in relation to the licensed software (the support agreement). A termination provision in the licence agreement provided that:
‘In the event that the [support agreement] is terminated for any reason whatsoever this agreement [the licence agreement] shall be terminated forthwith (the termination provision).’
A variation agreement inserted a provision that varied the licence agreement period from ten years to one of ‘perpetual’ duration (the variation agreement). Several years after this variation, AB Agri terminated the support agreement. One issue before the court was whether the termination of the support agreement still had the effect of terminating the licence agreement, notwithstanding that the term of the licence agreement had been varied to last for a period of perpetual duration.
AB Agri submitted that the termination provision was incompatible with the term in the variation agreement, providing for a perpetual licence, and that therefore the licence agreement remained in effect. BMS disagreed and argued that the licence agreement and the support agreement were linked and should be read in conjunction with one another. As such it submitted that the licence agreement was validly terminated.
The judge at first instance, Sales J, basing his decision on general construction principles, favoured the submissions of BMS. He found the term ‘perpetual’ to mean ‘operating without limit of time’, and on that interpretation found that there was no incompatibility between the variation of the licence agreement and the disputed termination provision. He gave the following reasons for this decision:
‘Was plainly not intended to wholly displace the licence agreement… the choice of words “will be extended” rather than a phrase such as “will be replaced by” indicate[d] that it [was] the same licence as in the licence agreement.’
The effect of the judge’s ruling was that the licence agreement was terminated along with the support agreement. Clearly, this was not the outcome AB Agri had intended when it terminated the support agreement.
The decision in BMS highlights the importance of the need to consider the effect that a contract variation can have on all original contract terms. Express reference to the intent of a variation on terms that are important to the contractual relationship as a whole is the only safe way to avoid unintended outcomes.
drafting tips when varying contracts