Until now, Engli
sh courts have been reluctant to imply a duty of good faith into commercial contracts, viewing such a duty as an unreasonable restriction on the parties’ freedom to pursue their own best interests. However, it appears to be all change following the recent Court of Appeal decision in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB).
In this case, the Court of Appeal considered whether the defendant party to a distribution agreement had an implied duty to act in good faith in performing its obligations and whether its conduct – including late or non-delivery of orders, under-cutting agreed prices and providing the claimant with false information – amounted to a repudiatory breach of contract. In finding for the claimant, the Court of Appeal held that:
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Whether parties have an implied duty to perform a contract in good faith depends on the specific circumstances, such as the “presumed intentions of the parties” and the relevant background to the contract, including “matters of fact known to the parties and shared values and norms of behaviour”.
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Although there was unlikely to be a general duty of disclosure in contracts involving a simple exchange, the situation is different in the case of so-called “relational” contracts such as joint venture, franchise and long-term distributorship agreements. These agreements “may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and necessary to give business efficacy to the arrangements”.
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Bad faith in the context of relational contracts is not limited to lying but also extends to conduct which, objectively viewed, is commercially unacceptable. Depending on the context, examples might include failing to disclose material information, failing to correct information which although believed to be true when given is later discovered to be false, or “deliberately avoiding giving an answer, or giving an answer which is evasive, in response to a request for information”.
This case highlights the continued creep of the doctrine of good faith into the English legal system and demonstrates that it can no longer be viewed as a concept peculiar to civil law jurisdictions. Following the decision, parties to relational contracts will need to look beyond the strict terms of the contract and consider whether, in all the circumstances, they have an implied duty to perform their obligations in good faith. If so, they will need to be very careful to avoid conduct which could be regarded as commercially unacceptable in the eyes of reasonable and honest people.
Today's Court of Appeal judgment in HMRC v BAA Limited, is important as, although there might have been initial disappointment on its release for a bidding company in the course of a takeover of a target company - with the Court of Appeal confirming that VAT input tax on professional fees which may be incurred is irrecoverable - it does depend on the factual matrix.
Indeed, it appears that the door has been left ajar to support VAT recovery for the bidder who, in the usual way, actively manages its investments, provided that it both evidences its intention to provide services post-completion, and does so - as then, prima facie, there is an "economic activity".
While we have to wait and see if HMRC offers guidance in due course in this area, what should be now? Well:
- Where deals have completed, a bidder should review its VAT recovery position, particularly with a view to mitigating any potential interest/penalties.
- For deals yet to complete, a bidder should take advice as to the structure of the bid and how to document it to increase their chances of recovery
About the author
Stuart Long is a partner and Head of our Tax team.
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The UK Government has today unveiled, in draft guidance, new rules coming into effect on 1 April 2013 that, in essence, will allow Government departments to ban companies and individuals which have taken part in “failed tax avoidance schemes” from being awarded Government contracts.
How will the policy be applied in practice?
Broadly, potential suppliers will be asked to self-certify their recent tax compliance history during the selection process and will be assessed on a “pass” or “fail” basis. Aggravating factors to be considered include the number of “occasions of non-compliance” and significant penalties or criminal sanctions.
Who will be affected?
UK and foreign suppliers who are participating in procurement exercises, sub-contractors who perform a significant part of a contract, and individuals, partnerships and companies who are bidding for Government contracts.
What types of contracts will the new policy apply to?
The new policy will apply to “above-threshold contracts” (outlined in the European Commission current rules) with all central Government departments, their executive agencies and Non-Departmental Public Bodies. It is also intended to be used by all other public bodies and public service providers. Call-off contracts are not automatically subject to the new policy.
What should be disclosed?
All “occasions of non compliance” which have occurred within ten years.
“Occasions of non-compliance” include but are not limited to when:
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a tax return is found to be incorrect due to a successful challenge by HMRC, or is amended following litigation, or by agreement, due to a targeted anti-avoidance rule, the General Anti Abuse Rule (to be enacted), or, in VAT transactions, the “Halifax abuse” principle;
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any tax return is found to be incorrect because a scheme which was (or should have been) disclosed under the “DOTAS” rules has proved to have failed (the guidance indicates a scheme will have “proved to have failed” where a taxpayer loses in the first tier tribunal); or
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a supplier’s tax affairs have led to conviction for tax related offence, evasion or fraud.
It is important to note that the “occasions of non-compliance” apply to all HMRC administered taxes and foreign equivalents, including (but not limited to): Corporation Tax; VAT; Stamp Duty Land Tax; Income Tax; National Insurance; and Capital Gains Tax.
Your comments and views
We are collating comments and proposals on an anonymous basis for submission to HMRC and would welcome input from those who believe they may be affected. Please do not hesitate to contact our Head of Tax, Stuart Long (details below), should you have any comments you would like to be included. The deadline is the end of this month, 28th February 2013. Alternatively, please feel free to post a comment below, noting that your name and views will be public.
About the authors
Stuart Long is a partner and Head of our Tax team.
Email me | View my profile
Anika Hayter is a solicitor in our Tax team.
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Care should be taken in the use of any kind of partnership (general, limited or LLP) for the purpose of operating some forms of joint investment activity. The Financial Services and Markets Act ("FSMA") regulates what it terms as "Collective Investment Schemes" ("CIS") in ways which can produce traps for the unwary.
The definition of CIS is broad and if it is used in particular ways would include any form of partnership (as distinct from a company). Essentially if a partnership is used as a vehicle to invest in virtually any kind of property on behalf of a group of investors, who are not all involved in the day to day management of the investment activity, it will fall within the definition of a CIS.
For instance, suppose a group of 5 or 6 individuals got together and formed an LLP to act as a vehicle for them to invest in buy-to-let flats. Then, if it was agreed that one of them would deal with the management of the purchases and the properties after purchase, perhaps for a fee or a higher share of profits, with the others as more or less sleeping partners, then that would constitute a CIS.
This has two principal consequences:
- any form of marketing of interests in the partnership to third parties is likely to be caught under the relevant regulations and unless carried out strictly in accordance with them, e.g. by the marketing being carried out only by persons authorised to do so by the Financial Services Authority ("FSA") or in very limited ways, such as to qualifying high net worth individuals, criminal offences are likely to be committed; and
- the person running the partnership's activities must be authorised to do so by the FSA and again, if he does so without such authority, he will commit an offence.
Age discrimination has been unlawful since 2006 and the original exception permitting employers to retire employees at age 65 was abolished in 2011. No exception has ever existed for Partners so any provision, commonly seen in Partnership Deeds, requiring Partners to retire at a certain age will be discriminatory unless it can be objectively justified. Direct age discrimination, unlike other forms of direct discrimination, can potentially be objectively justified if there is a legitimate aim being pursued and the treatment is proportionate to achieving that aim.
Following the much anticipated decision of Seldon v Clarkson, Wright & Jakes, partnerships can breathe a collective sigh of relief: the Supreme Court ruled that the law firm had legitimate aims for compulsorily retiring a partner in the firm at the end of the year in which he reached 65 in accordance with its Partnership Deed. The case will now return to the Employment Tribunal for it to decide whether the firm's retirement age was a proportionate means of achieving those aims.
The Supreme Court held that, in order to justify direct age discrimination, the legitimate aims must be "social policy objectives" and not simply reasons particular to the individual employer or firm's situation, in contrast to the approach which can be taken to justify indirect discrimination (which applies to most types of discrimination).
The Court identified two different kinds of legitimate social policy objective:-
- inter-generational fairness, which could include facilitating access to associates of the opportunity of partnership after a reasonable period and/or enabling older people to remain in the partnership; and
- dignity, including limiting the need to dismiss older workers/partners on the grounds of underperformance and thereby preserving their dignity, and avoiding humiliation and potentially costly and divisive disputes.
Partnerships can derive comfort from this decision: retirement ages will not be unlawful in Partnership Deeds if they can be shown to be a proportionate means of achieving a legitimate aim, which satisfies both the firm's and public interest needs. The Court also recognised some of the economic challenges which firms will face and acknowledged that flexibility may be necessary.
But that does not give firms carte blanche to retire partners compulsorily. The legitimate aim will need to be carefully considered in each case and the firm will need to be able to demonstrate a public interest aim, which applies in its business, as well as proportionality: is it the least discriminatory way to achieve that aim? Each case will be fact sensitive but we await with interest the Tribunal's decision in the on-going Seldon litigation on proportionality.
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Limited Partnerships (LPs) were first introduced in 1907 by the Limited Partners Act but in more recent years have provided a structure for venture capital and investment funds. The original form of partnership - General Partnerships – involved unlimited liability and so carried risks for potential partners and discouraged passive investors. The LP allowed those with working capital to enter into a position of limited liability, whereby the most they could lose was the amount invested, and not their personal wealth.
LPs have a clear demarcation between the general partners, whose job it is to run the business, and the limited partners who fund much of the partnership's capital but cannot have a direct influence over its day-to-day running. The 1907 Act dictates that any limited partner engaging in the business' management assumes unlimited liability and so puts their personal wealth at risk.
Despite being supplemented by the Limited Liability Partnership in 2000, LPs remain useful in situations where it is necessary or preferable that investors and general partners who run the business remain separate. It is for this reason that the LP has become the structure of choice for a huge number of venture capital and other kinds of investment funds.
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Informal email exchanges can give rise to binding legal obligations. If your negotiations are not expressly made "subject to contract", or you are performing the contract before a written agreement is signed, you may be legally bound without realising it.
In an ideal world, business negotiations would always end with one complete, final document being signed. In reality, pressure to get on with what has been agreed will often mean that no final, written document is ever created. While parties might not think they can be bound before they have put their signature on a formal document, that is not always the case.
A recent case has highlighted the obligations that can arise through 'pre-contractual' email negotiations. This briefing note provides some practical precautions to apply to your negotiations.
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This Summer’s Olympics are going to present opportunities and challenges to all businesses. If you want to make reference to the Games in the course of your business, whether by advertising your proximity to an Olympic Venue, throwing an Olympic themed party or giving special offers to Olympic ticket holders, you will need to think very carefully.
Names, logos, symbols, words, mottos and phrases relating to the Olympics, Paralympics and the London 2012 Games (“Games Marks”) are protected by a heady combination of copyright, registered trademarks, registered community designs, common law and specially crafted legislation.
LOCOG have raised hundreds of millions of pounds in sponsorship and licensing fees and therefore cannot allow those rights to be devalued by unauthorised use. British business, on the other hand, want to make the most of the Games and the increased footfall and business opportunities that it will present. Business will also be keen to celebrate the Games and to share those celebrations with employees and customers.
But restrictions in relation to the Olympics are very wide and very strict and you may not even realise that what you propose to do may be unlawful.
The Games Marks (which include the obvious things like the five ring symbol, the Olympic and the words Olympic and Paralympic (and numerous variations thereof) themselves cannot be used in the course of trade without the necessary consents. However, it is also an offence, if you are not an official sponsor or licensee, to use “any representation” which is likely to suggest to the public that there is an association between your goods or services and the Games. The concept of association includes any kind of contractual, commercial, corporate, structural or financial connection.
When considering whether an infringing association has been created, a court may take into particular account the use of certain combinations of proscribed words and phrases such as “Games” and “2012”.
LOCOG are expecting business to be sporting (pun intended) and to comply with both the spirit of the legislation and the word. There is guidance available on-line for businesses about what they can and can’t do but if in doubt please take some specialist advice. This blog contains general information only and not advice.
The power and influence of social media has finally been recognised and written into heads of terms. A Landlord has requested that a potential tenant should:
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Link from the tenant’s website to the Landlord’s
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Like the Landlord’s facebook page
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Follow the Landlord on twitter
In addition the Landlord has stipulated exactly how the tenant uses and phrases the address details in all marketing materials.
This is the most overt request that we have seen and in our view confirmation that the Landlord thinks social media will help to drive prestige, footfall and no doubt increase rents to!