Using directors' powers for their proper purposes

Doing the right thing for all the wrong reasons

One of the more subtle aspects of a director's duties is the obligation to use his powers  only for the purpose for which they were granted. this duty was often known only to company law experts until it was codified in s171(b) Companies Act 2006.

The Supreme Court has just given a reminder of this duty in Eclairs Group v JKX Oil & Gas Plc. The company's board served information disclosure notices on two major shareholders, holding 39% of the voting rights. they then decided that the responses were inadequate and exercised powers to remove the shareholders' voting rights. The court concluded that the directors were motivated by the desire to stop these shareholders voting against the board's proposals at a forthcoming meeting, and not by a wish to achieve disclosure the information they had requested - so the decisions were invalid.

How do you disentangle all the complicated motives that lead a single director, still less a whole board, to come to a decision? Lord Sumption said, "Directors of companies cannot be expected to maintain an unworldly ignorance of the consequences of their acts or a lofty indifference to their implications. A director may be perfectly conscious of the collateral advantages of the course of action that he proposes, while appreciating that they are not legitimate reasons for adopting it. He may even enthusiastically welcome them. It does not follow without more that the pursuit of those advantages was his purpose in supporting the decision. All of these problems are aggravated where there are several directors, each with his own point of view." But he approved the formulations from earlier cases, "if, except for some ulterior and illegitimate object, the power would not have been exercised, that which has been attempted as an ostensible exercise of the power will be void, notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable," and "regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the [decision] will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, the power would not have been exercised."

The most common abuse of powers for an improper purpose seems to be in the issue of shares, where the power to allot shares is used to dilute minority shareholdings or distort the voting control of the company. The power to issue shares is primarily for the purpose of raising capital for the company, and its use as a weapon in shareholder disputes will usually be illegitimate. Dressing it up as a rights issue, perhaps where you know the minority have no money to invest, will not help if the rights issue would not have happened but for the intention to bring about the change of control.

Penalty clauses are unenforceable - aren't they?

It was never a penalty!

The law has been clear: a clause in a contract imposing a penalty for breach of contract was unenforceable. What was completely unclear was  (1) what amounted to penalty and (2) whether the rule applied beyond the payment of money following a breach of contract. For many years the accepted formulation was that if contract term provided for a payment which was "more than a genuine pre-estimate of loss" it would be an unenforceable penalty; otherwise it was a legitimate "liquidated damages" clause and not a penalty. In more recent years more complex cases have tested the rule, involving more than a straightforward payment for non-performance. the trend seemed to suggest that any clause whose effect was intended to be deterrence rather than compensation was potentially vulnerable to attack as a penalty.

In a judgment today (4 November 2015) these developments of the law on invalid penalty clauses has been rolled back by the Supreme Court. It gave a combined judgment on two cases that could hardly be more different. Cavendish Square Holding v El Makdessi concerned "bad leaver" type clauses  under which Mr El Makdessi, who had sold shares in a company, stood to lose the remaining instalments of the price and to be forced to sell his remaining shares cheap — the last limb alone would cost him $44m — because he had breached non-compete covenants. ParkingEye v Beavis was about an £85 penalty charge for overstaying in a retail car park.

In both cases the Supreme Court said the clauses were not penalties and were valid. The test for a penalty is now "whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract", which will allow far more aggressive terms than some of the cases suggested. Deterrents are allowed, so long as they are not exorbitant or unconscionable, and there is no longer any necessary relationship with the damages that might be awarded by the courts for the breach. Contract writers are likely to become bolder in specifying remedies for breach.

Most “bad leaver” clauses are now probably safe, though still subject to possible equitable relief from forfeiture if the party in breach can provide recompense by other means. 

The £85 parking overstay charge was also held not to be an unreasonable term under the Unfair Terms in Consumer Contracts Regulations 1999 (now Part 2 of the Consumer Rights Act 2015).

The Supreme Court did close one loophole: in deciding whether the clause is a remedy for a breach of contract, the courts will look at the substance of the obligations and not just at how they are expressed. Writing the contract so that there is no breach, but just a conditional obligation, will not get round the rule on penalties if the substance is that one is the primary obligation and the payment is a secondary compensation: so if instead of saying "you must supply the goods; if you do not supply the goods you will pay me £1m" you say "you can either supply the goods or pay me £1m", the court can still decide that the supply of the goods is the primary obligation and the payment is a penalty for breach of it.

The case is a victory for traditional freedom of contract and for certainty, at the expense of the introduction of concepts of fairness, proportionality and the protection of the weaker party into contract law.

US stock option plans subject to English law?

Courts clash on jurisdiction over employees 

It will come as a great surprise to many international employers that their US stock option plans are subject to the exclusive jurisdiction of European courts, as the plans apply to employees in Europe.

Many American companies offer stock option plans or other share incentives on a global basis, with employees having conditional rights to receive stock in the US holding company, or stock issued by a vehicle created for the purpose in the USA. The stock option plan will be established in a state of the USA and subject to its laws, and may or may not be tailored through sub-plans to meet tax requirements in other countries, such as the Enterprise Management Incentive Scheme in the UK.
Rights are granted under a contract direct between the American entity and the employee. 

The Brussels Regulation (recast) governs the jurisdiction of all courts in the EU to hear cases, and says that an employer may bring proceedings only in the courts of the Member State in which the employee is domiciled. At first glance, the stock plan is not an "individual contract of employment" and the US entity is not the employer, so the special rules for contracts of employment in would not apply. As an English lawyer I have no difficulty with the concept of a separate contract with a third party dealing with stock options or incentives, and I would not consider it to be a contract of employment, or the incentive provider to be an employer. Indeed, in English law it has been held that a share option is not a term of the contract of employment: Micklefield v SAC Technology Ltd [1990] 1 W.L.R. 1002. 

But Samengo-Turner v J & H Marsh & McLennan (Services) Ltd held that words used in EU legislation must be given an autonomous (European) meaning so that each Member State will apply it consistently and not interpret it in accordance with its own national law. The terms of the Brussels Regulation are essentially an employment protection measure, to stop employees being sued anywhere other than than their own home jurisdiction, and the English courts would give effect to that: not only by including any contract relating to employment as an "individual contract of employment" and the benefits provider as an employer, but also by granting an anti-suit injunction preventing the foreign company from taking proceedings in its own country.

In the recent case Petter v EMC Europe Ltd the English Court of Appeal became engaged in an unseemly scramble to establish jurisdiction either in England or in Massachusetts, with both courts being asked to grant injunctions preventing a party from continuing proceedings in the other place. Courts of different countries usually try to respect each other and not fight over jurisdiction, but in this case the Court of Appeal decided it had to grant an injunction effectively overturning the decision of the Massachusetts court, in order to protect the employment rights of UK employees.

A fight over the choice of court is not the end of the matter: an English court will still apply foreign law if that is the law chosen in the contract: the Rome I Regulation on the law applicable to contractual obligations allows the parties to choose the applicable law, even for a contract of employment, and an English court can apply foreign law if presented with evidence of what the foreign law is. However, this is subject to the application of mandatory rules of local law. Whilst the courts of England and Massachusetts should theoretically apply the same laws in reaching their decision, a court in England is likely to give far greater weight to English employment rules such as the duty of trust and confidence between employer and employee, principles of English law banning contractual penalties and granting relief from forfeiture of assets, restrictions on deductions from pay and the requirements for non-compete restrictions not to be unreasonable restrains of trade. The legal environment in the UK is far more friendly to the employee than in the USA, so employees may be very keen indeed to have any litigation heard here.

Dangers for nominee directors - and those appointing them

Directors' responsibilities in sharp relief, and a piercing of the veil of limited liability?

There may be nothing new in the idea that a nominee director must exercise independent judgement and act in the interests of his own particular company, rather than the interests of a parent company or the person appointing him, but Central Bank of Ecuador v Conticorp SA provides an eye-watering illustration to make nominee directors sit up and think!

A Mr Taylor, acting as nominee of a banking group, was the sole director of a Bahamas company. He acted only on the instructions of the banking group, and was paid the princely sum of $2,500 a year for acting as director. On instructions, he signed away a portfolio of assets worth $190m in a transaction at an undervalue. He made no enquiries as to the commercial benefit to his company of the transaction, and did not exercise any independent judgement. Because of that, he was fixed with the knowledge of the nature of the transaction of those instructing him. He was found personally liable for the whole $190m, plus interest that took the claim over $1/2billion.

That can easily happen when someone takes the office of director without taking seriously the attached responsibilities. Perhaps more interesting from  a legal perspective, and more worrying for corporate groups, is that the court also found that other group companies, and individuals in them, were also liable for the full amount due to their "dishonest assistance" of a breach of fiduciary duty. That potentially gives a claimant a much wider range of defendants to aim at, and could effectively avoid the limited liability of the company. It is not only the deluded nominee director who is at risk, but also those who give him instructions and devise the company's transactions. The other people involved could could not honestly have considered the transactions to be in the company’s interests, in the light of what they knew, so they were liable for dishonest assistance.

Turning a blind eye can be enough to establish liability for dishonest assistance: “Dishonest assistance requires a dishonest state of mind on the part of the person who assists in a breach of trust. Such a state of mind may consist in knowledge that the transaction is one in which he cannot honestly participate (for example, a misappropriation of other people’s money), or it may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge..." (Barlow Clowes International Ltd v Eurotrust International Ltd).

No-one should ever act as a "nominee" director, in the sense of blindly acting on the instructions of someone else; but nor should anyone assume that they can safely let such arrangements go ahead when it is plain that there is a breach of duty, or  plain enough to require further investigation.

Insolvency and consumer credit businesses

A trap for administrators and a workload for the FCA

Consumer credit businesses used to be licensed by the OFT, in a fairly relaxed licensing regime. It included not only consumer credit lenders, but also businesses with a tangential involvement in credit such as credit brokers, debt collectors and debt advisers. Credit brokers include most businesses who introduce consumers to credit providers, such as motor, furniture and electrical retailers. Many large businesses held consumer credit licences for minor activities outside of their main businesses, such as employee loan schemes or other employee benefits.

The Financial Conduct Authority has now taken over regulation of consumer credit, with all the complexity of the financial services regime. Consumer credit businesses have become "authorised persons" (including those who have the transitional "interim permission"). That has many consequences, some of them possibly unforeseen. One of them is the application of the FSMA insolvency legislation to all consumer credit businesses.

A possible major trap is that an appointment of an administrator by the directors of a consumer credit authorised business, or of one that should be authorised, needs the prior consent of the FCA (section 362A FSMA 2000). The directors must obtain the consent of the FCA before filing a Notice of Intention to Appoint Administrators, or if there is no qualifying floating charge holder and therefore no need to file such a notice, the consent must be filed at the same time as the Notice of Appointment of Administrators. Failure to obtain the FCA’s consent renders the administrator's appointment invalid; but the case of Peter Lloyd Bootes and others v Ceart Risk Services Ltd holds that this is a curable defect, so the appointment will take effect when the consent is obtained and filed.  

If there is a qualifying floating charge holder, and it makes the appointment, no prior consent of the FCA is required. But all documents in relation to the administration issued to creditors must also be sent to the FCA, and similar requirements apply to other forms of insolvency.

This is yet another thing for insolvency practitioners to look out for before appointment, and a potential source of uncertainty in the validity of appointments. A search of the FCA register should probably be routine (and the separate specialist registers, including the consumer credit register), but even that is not complete protection: if the business should have been authorised, for instance because it introduced consumers to credit providers, the FCA's consent is still needed. Whether the FCA will give timely consents in respect of firms it has never heard of, or precautionary applications for consent, remains to be seen.

New Companies House search facility

First impression of the new free access to UK company data

The new Companies House search facility, giving free access to information on UK companies and copies of filed documents, has been launched in beta here.

My first impression is that it's excellent - immediate one-click access to documents, a huge improvement on the previous elaborate process of selecting, paying for and downloading documents through the public Webcheck facility and the subscription services used by business customers.

The only downside I can see is that information is now so easily accessible that I'm sure there will be an increase in abuse. There appears to be no attempt to prevent automated services harvesting information, which is now all free of charge, which could be used to assist in identity fraud, to identify targets for spam, or to put together more sophisticated abuses. the information was all there before, but was only available if you knew you wanted it and  were prepared to pay your quid per document.

Unsigned contracts can be binding

Not worth the paper it isn't written on?

A recent High Court case is the latest reminder that even where the parties intend to enter into a formal written contract, they can become bound by the contract even before it is signed.

Most kinds of contract do not need any particular formality, such as written terms or a signature (property contracts being a notable exception). Written terms can be accepted orally. Contract terms can be accepted by conduct, even where the written terms make it clear that a formal signature was expected, and even where there are remaining terms that have not been agreed.
In A v B the buyer of a large quantity of cotton did not sign the purchase contracts, but did initiate the price fixing mechanism under the contract terms. The court held that this was unequivocal acceptance of the contract terms, so the buyer was bound by the contract. The seller was awarded over US$7m.

This is not new: if the parties work under the terms of a document, even a draft document, the court is likely to conclude that they intended those terms to be binding. Similar cases include RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) in the Supreme Court in 2010, and it was held long ago that the partnership deed for a solicitors' firm became binding even though it was never formally executed.

Once commercial parties start to work together, the court will be very reluctant to find that there is no contractual relationship. The question then is what the agreed terms are. the most obvious source is the latest draft of the proposed written contract. that seems obvious, if all the terms were in fact agreed; but what if one party was holding out for something they regarded as important, which the other side clearly had not agreed? In RTS v Muller the Supreme Court said "an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement." So it is bad luck, or carelessness, on the part of the person arguing for the extra condition.


The same applies to an agreement that is expressly "subject to contract". If the parties start to work to the terms, the court is likely to say that the "subject to contract" position has been waived.

There would be no contract if all the "essential" terms were not agreed, but what is "essential" is just the legal minimum to create a binding contract. The law does not require all commercially-sensible terms to have been agreed - just price and quantity may be enough.

These cases are over the negotiation of bespoke terms, but they are related to the "battles of the forms" where both sides try to impose their standard terms - usually the buyer is assumed to have accepted the seller's terms by accepting delivery of the goods.

How should you protect yourself? If you must start work on a project before the formal contract is signed, it is best to have an interim agreement (often called a letter of intent) that sets out the terms for the immediate work, and what will happen if the parties fail to reach agreement on the main contract. An agreement to agree is generally unenforceable, so the interim agreement should include terms to unwind the relationship and ensure that no-one loses out unfairly if the terms do not get agreed.

Data protection: enforced subject access requests

Demanding CRB checks now an offence

Employers and service providers requiring individuals to obtain and disclose certain protected data, such as criminal records checks or barring records, will commit an offence from 1 December 2014.
Only employers in certain sensitive occupations can lawfully obtain enhanced criminal record checks from the Disclosure and Barring Service (still often called "enhanced CRB checks"). Some employers and service providers, such as insurance companies, have developed a practice of insisting that applicants exercise their rights under the Data Protection Act to obtain their own sensitive personal data, then provide a copy of the report to the company. The report might be from the Disclosure and Barring Service (which replaced the Criminal Records Bureau and the Independent Safeguarding Authority), the police or the government.

Many businesses will have to change their practices as a result. Some unfortunately have not realised that rights to privacy are now real and are here to stay, even relating to important matters such as serious criminal records or preventing insurance fraud.

There are exceptions where the company is authorised by law to obtain the information or where obtaining them is in the public interest, but in most cases it will no longer be possible to circumvent the restrictions on who can access this sensitive data.

What does "in witness" mean in in my legal document?

What meaneth witnesseth?

What do those strange words about "witnesseth" (or similar) mean, at the beginning and end of a legal document?

Apart from telling you that your solicitor is a bit old-fashioned, they don't add a great deal.

"In witness whereof" does not have anything to do with witnesses to the signatures. It means "as evidence of which", or "to demonstrate their agreement". It has no particular legal significance in the modern age, except that in England a document intended to have effect as a deed must say so, and this is the usual place to do that: "in witness whereof the parties have executed this document as a deed on..." This is the "testimonial clause"  or "incujus rei testimonium" and it matches the testatum at the beginning of the document, after the recitals, traditionally "Now this deed witnesseth...". What is sandwiched between the two is the operative part of the deed, so the recitals or schedules do not normally have legal effect as operative provisions unless the deed says so.

It can certainly but put in modern English. I start the business part of my documents with a heading "Operative provisions:" and end with "The parties have [signed this agreement][executed this document as a deed] on the date stated at the top of page 1." I just hope my abandoning tradition never ends up being challenged in the Court of Appeal!

Proportionate liability clauses upheld

Need a small slip make you liable for the whole loss?

For many years, businesses have been trying to limit liability according to their fair share of the fault.  Among the first to argue for "proportionate liability" were the big accountants, who are regularly sued over corporate failures because their insurers had deep pockets. The issue frequently arises in the constructions industry, where there are often several firms of contractors and professionals who might share responsibility for a fault or delay.

In most cases, where there are two or more possible defendants, they will be jointly and severally liable for the loss. that means the claimant can sue any or all of them, and recover the whole of his loss from the chosen defendant, leaving the defendants to sort out contributions amongst themselves. that can be very unfair to defendant if the others have gone bust or disappeared. In the very worst cases it can even make claimants careless about the choice of contractors: so long as they have one solid defendant, they need not worry about the competence or financial strength of the others.

"Net contribution clauses" have often been inserted in contracts, but lawyers have doubted whether they worked. Now the Court of Appeal has confirmed that they do - even in consumer contracts.

In West v Ian Finlay & Associates a very simple term was held to work: "Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you". The clause protected an architect from liability for the part of the claimant's loss fairly attributable to defective work by the (insolvent) building contractor. It survived challenges under the Unfair Terms in Consumer Contracts Regulations and the Unfair Contract Terms Act 1977.

All businesses which could potentially share liability with others should review their contract terms and consider whether they should be using a net contribution clause. That includes most businesses in the construction industry and most professional firms. It remains to be seen whether the same approach can be extended to exclude liability for the defaults of your own sub-contractors.

Consumer credit licences all expire

If you haven't acted, your consumer credit activities are now illegal

All licences granted by the OFT under the Consumer Credit Act 1974 lapse at midnight tonight. That includes the group licence granted to all solicitors.

 

From tomorrow (1 April 2014), consumer credit businesses - including ancillary activities such as credit brokerage and debt collection - require authorisation by the Financial Conduct Authority. If you haven't already applied for interim authorisation, you will need to stop carrying on the regulated activity until you have gone through the application process - likely to take some months.

 

There is no general permission for solicitors, so those engaged in consumer credit activities, including debt collection from consumers, now have to be dual-regulated by the FCA and the SRA (and pay two sets of fees for the privilege). Will consumers be any better off? No, of course not.

Address for service

Directors' risk of being served with a claim in the UK

Directors of UK companies have to give an "address for service" to Companies House. This came in in 2009 as a trade-off for the ability to conceal the director's home address (section 1140 Companies Act 2006).

In a surprising decision, a Master of the High Court has ruled that the address for service at Companies House can be used to serve any document on the director, including a claim form starting legal proceedings against him which were unrelated to the company in question (Key Homes Bradford Ltd & Ors v Patel [2014] EWHC B1 (Ch) 10 January 2014). That applies even if the director is not in the UK, and proceedings against him could not otherwise be started in England without the court giving leave to serve proceedings outside the UK (which is not automatic), and an expensive process of serving abroad. The usual rules of court requiring an individual to be served at his usual or last known residence are overridden.

Directors' addresses for service are often given quite casually, often as the company's registered office, perhaps without consulting the director in question. Now it is clear that directors should take more interest, especially directors resident abroad. Giving an address for service in the UK makes them vulnerable to being sued in England much more easily, even in unrelated matters. They can also be seriously prejudiced if proceedings are served at the company's offices and are not passed on. Disputes with the company are a particular risk: the company may be tempted to serve its claim at its own office, not pass the papers to the defendant, and enter judgment in default.

It is even possible that the address for service can be used for things that would otherwise have to be served personally, such as a statutory demand in bankruptcy or a court order threatening imprisonment for contempt.

Advisers should be much more careful in future about giving an address for service for directors, especially for those resident overseas. The address given does not have to be in the UK, and if it is outside the UK it would still be necessary to get leave from the court to serve a claim form there. Even UK directors might want to give an address abroad!

Negligence: staying out of the firing line

Shared responsibility in a professional team

Professionals work in teams, formally or informally, on all sorts of projects. Where something goes wrong, it may not be clear that one professional firm is solely responsible.  One professional may have relied entirely on another to do his bit, either by agreement between them or because it naturally fitted in the other's area of expertise; or one may have appointed the other to assist. Successive advisers may have made the same mistake. Two advisers may assume that each other are dealing with an issue. If work or advice has been negligent, the client will be tempted to sue all parties and let them fight it out amongst themselves. It may come down to assessing the contributions to be made by different parties.

In Flanagan v Greenbanks Ltd (t/a Lazenby Insulation) & Cross two successive firms carried out negligent surveys to assess suitability for cavity wall insulation. The Court of Appeal said that both were liable: the negligence of the later survey had not absolved the earlier one of responsibility, nor could the second firm assume that the first had done its work correctly without checking.

Firms can improve their position if sued by including suitable terms in their conditions of engagement - subject always to the usual considerations on limitation and exclusion clauses, especially in consumer contracts. Something like this can help:

"Where other professionals are engaged by you or on your behalf (including any predecessor of ours), we will be entitled to rely on the work and advice of those other professionals and to assume that they have carried out their work with due care and skill and to all relevant standards. We will not be responsible for checking or re-doing their work, or for checking their instructions, assumptions or conclusions, unless specifically instructed to do so, and then only to the extent falling within our area of expertise. We may review or comment upon the work of other professionals where we consider it appropriate but we will not be obliged to so and by doing so we do not assume responsibility for such work. Where we engage or recommend other professionals, our responsibility for their work is limited to selecting professionals whom we believe to be reasonably suitable for the purpose. Where we engage such professionals with ourselves as principals (and not as your agents) our liability for loss or damage arising directly or indirectly from their act or default (including negligence) is limited to the amount we are actually able to recover from them. If we recommend the engagement of other professionals but you decline to do so, we will not be liable for any loss or damage which would have been avoided had such professionals been engaged."

Of course it also helps if the roles of the professional teams are clearly defined, and if each member has a proper definition of its scope of work and terms of engagement. Specifically exclude from your scope of work any high-risk areas you don't regard as part of your role, and adapt your contract terms carefully to each situation.

Valuing partner contributions

Fame at last: published in Solicitors Journal

I have had an article published in Solicitors Journal (25 November 2013) about valuing partner contributions in law firms -http://www.solicitorsjournal.co.uk/management/business-development/finders-minders-and-grinders-working-out-attribution-system-between- (but you have to be a subscriber or to sign up for a trial to read the full article). 

It argues that different partners perceive value very differently, that it's easy to over-estimate the importance of any individual, and that firms have to be careful not to reward more than once for each £1 of profit earned, and to know whether they are recognising achievement only in the current year, or for an entire career.

Retention of title and paying the price

Tangled ROT clauses come unravelled

Retention of title (ROT) clauses have been controversial for over 30 years. When selling goods to a business buyer on credit, you want to keep ownership of your goods until you are paid. If the buyer goes bust, you can hope to retrieve your goods, or claim their value in priority to the unsecured creditors of the buyer. You need an express contract clause to do this: it is not a right given by the general law.

We had thought the law on ROT clauses was becoming fairly settled. The long arguments that used to accompany almost every insolvency are now reduced to a bit of wrangling with the insolvency practitioner. It is fairly settled that the basic form of ROT clause works: you retain title to your goods until they have been paid for. Fancier extensions of the clause are usually not effective. They include:

·         the “all monies” clause which purports to retain title until every debt owed to you has been paid – where there is continuous trading between the parties, this would mean that title would never pass because something was always owing

·         trying to continue ownership of the goods after they have been sold to the buyer’s customers – quite apart from practicalities, section 25 of the Sale of Goods Act says that a buyer in possession of goods with the permission of the seller can pass good title to a buyer from him

·         trust clauses, which purports to give you special rights over the proceeds of sale of the goods when your buyer sells them on. These usually amount to a charge, requiring registration at Companies House and ranking behind other charges on the buyer’s assets

·         agency clauses, which say that the buyer is not in fact buying at all, at least until he pays you, and if he sells the goods you are entitled to the full price from his buyer. If this works at all, this makes you a party to the contract with the sub-buyer and liable if anything goes wrong with the goods. In most cases it is inconsistent with the true commercial relationship and is likely to be ignored.

Two recent cases do not change this position greatly, but they do point to the importance of the drafting of the clause, and also to the fact that a clause which tries to do too much could end up not achieving anything at all. And that the law is still a mess.

Sandhu v Jet Star Retail Limited (in administration) and others is not particularly surprising. An “all monies” clause was held not to work. The surprising aspect was that the ROT clause failed completely, rather than applying just to the price of the actual goods remaining in stock. It is a very short judgment, but the reasoning seems to be that the administrators had already sold the stock before any claim was made, and the terms of the contract expressly allowed the buyer to sell the goods, and did not terminate that right upon insolvency. Therefore, the administrators were entitled to sell the goods, the retention of title ended upon sale and the administrators had done nothing wrong and so were not guilty of the tort of conversion (dealing with goods in a manner inconsistent with the owner’s rights). Had the clause been better drafted, it could have protected the seller so that he received at least the value of the goods remaining in stock at the time of insolvency, or the contract price for those goods, whichever was the lower. It is usually better to be conservative and draft your clause in a way that is likely to be effective under the current understanding of the law, rather than attempting to gain additional rights which put the whole clause at risk.

The more difficult case is Caterpillar (NI) Ltd v John Holt & Company (Liverpool) Ltd, a Court of Appeal case which I hope will be reviewed by the Supreme Court. This case again revolved around sub-sale of the goods by the buyer. The ROT clause was an “agency clause”, which purported to say that the first buyer received the goods not as a buyer, but as the agent of the seller, and sold them to the second buyer as agent of the seller. The Court of Appeal accepted, surprisingly, that this worked, and held that it meant that the first buyer was not liable to pay the sale price to the seller, as it had not bought the goods! Section 49 of the Sale of Goods Act says that a seller can sue for the price either when title to the goods has passed to the buyer, or  “the price is payable on a day certain irrespective of delivery”. As neither of these conditions applied, the seller could not sue for the price. He could probably claim damages for breach of contract, but that was outside the scope of the decision.

If this case remains good law, there are a number of steps sellers can take to improve their ROT clauses and payment clauses, including ensuring that payment is due on a “day certain irrespective of delivery” and removing any reference to agency. Clauses should either not expressly authorise resale of the goods at all, or if they do, should make sure this right does not continue following default and insolvency.