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Lease assignments and requests for landlord’s consent – administrators and assignees beware

Overview

A lease assignment is where a tenant wishes to divest itself of primary liability for obligations under a lease by assigning the lease to a third party. This can happen either as part of a sale of a business (e.g. where the incoming tenant will continue the existing tenant’s business) or as an independent transaction (e.g. where the incoming tenant does not wish to take over the existing tenant’s business but just wants to trade from the particular property).

In each case however, the landlord’s consent to the assignment of the lease to the incoming tenant is almost always required. This is dealt with by a Licence to Assign.

The request for the landlord’s consent will usually be made by the existing tenant. However, anyone acting with the tenant’s authority can request the consent.

When a company in administration is seeking to assign a lease the incoming tenant may request the consent because the administrators will wish to limit the costs incurred in dealing with the transaction. In doing so however the incoming tenant (or its solicitors) must make it clear that they are acting with the existing tenant’s authority otherwise the consent request will not be valid.

The recent case of TCG Pubs Ltd (“TCG”) v The Art or Mystery of the Girdlers of London (“Girdlers”) (2017) highlights the pitfalls of a party other than the existing tenant applying for landlord’s consent to assign.

Facts

Girdlers was the landlord and TCG the tenant under a lease. TCG entered administration in September 2015 and sought to assign the lease to Stonegate Pub Company Ltd (“Stonegate”).

In November 2015, Stonegate (the incoming tenant) wrote to Girdlers requesting that Girdlers grant consent to TCG to assign the lease to Stonegate. The request for consent therefore came from the incoming tenant rather than the existing tenant. The letter from Stonegate to Girdlers did not mention that Stonegate were acting with TCG’s authority but in fact Stonegate had obtained TCG’s authority to write to Girdlers on TCG’s behalf.

The court decided that the letter from Stonegate to Girdlers was not a valid request for consent because, while Stonegate had TCG’s authority, it had not conveyed this fact to Girdlers. Accordingly, as far as Girdlers was concerned, the consent was not requested in accordance with the lease.

The consequences of this were that the Girdlers were under no obligation to deal with the application for consent until they had been informed that Stonegate were acting with TCG’s authority.

Conclusion

Applications for consent are often considered routine and fairly straightforward. However, this decision shows that the procedure of obtaining consent cannot be considered lightly and that particular circumstances need to be taken into account.

In particular, a landlord is under a legal obligation to deal with an application for consent to assign a lease within a reasonable time but only if the application is valid which it will not be if not made by the existing tenant or with that tenant’s authority which is communicated to the landlord.

Short Richardson and Forth LLP have acted for both landlords and tenants when assigning leases in administration and are aware of how to avoid the potential pitfalls so that the transaction proceeds smoothly. Please contact Chris Morgan, a solicitor in our commercial property department on 0191 255 1515 or at chris.morgan@srflegal.co.uk for further information.

#lease #landlord #tenant

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Business Purchasers Beware – to Due Diligence and Beyond

Overview

When purchasing a business, however small, it is important to carry out due diligence. The level of due diligence required will depend on the size and type of the business but mostly on the purchase price. Whatever the price though it is important that due diligence is carried out to some degree.

It is common for the agreement which transfers the business to the buyer to include a clause stating that the seller assigns all the contracts in place for the business to the buyer. The logic behind this is so that the buyer can ‘hit the ground running’ and carry on the business where the seller left off.

The first stage is to make sure that the contract purported to be assigned, can, in law be assigned. If it is unassignable, then the buyer cannot take the benefit of it. Most contracts are, though, assignable.

If it can be assigned then to be a valid legal assignment, the other party to the contract must be informed that the seller has assigned the contract to the buyer. A failure to do so will mean that it is not a valid legal assignment.

It is therefore important that the buyer knows what contracts it will take an assignment of and that it deals with the assignment correctly otherwise the buyer may encounter difficulties down the line as in the recent case of General Nutrition Investment Company v Holland and Barrett International Ltd (2017).

Facts

In this case, the original party (“X”) entered into a contract with Holland and Barrett (“HB”). X then purported to assign the benefit of the contract to GNIC when GNIC took over several aspects of X’s business.

After the assignment took place, GNIC failed to notify HB of the assignment.

GNIC eventually came to the conclusion that HB had failed to comply with the terms of the contract and served notice on HB to terminate it.

HB challenged the termination notice on the grounds that the assignment was not legal because it had not been given notice of it at the time.

If HB was correct, it meant that GNIC was unable to bring the contract to an end and was still liable for the amounts due under it.

Decision

The court agreed with HB that the termination notice served by GNIC on HB did not validly bring the contract to an end because, when GNIC was assigned the contract by A, HB was not made aware of the assignment.

It is worth noting that the court did not take issue with the form of notice GNIC used to terminate the contract. Even though the form of notice was correct, at law, GNIC did not have the right to terminate the contract.

Comment

This case shows that, even after the transaction appears to have completed and the business is transferred to the buyer, the buyer (or more likely its legal advisers) still have work to do so that all third parties are made aware of the assignment of the business contracts to the buyer as part of the business transfer.

A failure to attend to this could mean that the buyer does not have the rights it appears to have under the contract and that it could find itself liable sometime after the contract, even if the other party to the assigned contract may be in breach.

Short Richardson and Forth solicitors receive instructions in respect of all types of business purchases and sales, including those valued in the multi-millions of pounds. If you are considering purchasing a business or have any related queries please contact Chris Morgan, a solicitor in our commercial and corporate department on 0191 211 1515 or at chris.morgan@srflegal.co.uk to discuss further.

#buyingbusiness #duediligence

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Disclaimer – what happens to the lease when one of the tenants is made bankrupt?

Overview

More than one person can be the tenant under a lease. For example, you may have ABC Limited as the landlord and then both X and Y both named as “the tenant”.

At law leases are held by the two people who form the tenant as ‘joint tenants’. Confusingly, this is not related to the lease itself. ‘Joint tenancy’ is a form of legal ownership which automatically occurs when more than one party owns a property, including a lease. A joint tenancy automatically creates a trust for both joint tenants. In our example therefore, X and Y would hold the legal interest in the lease as joint tenants on a trust for each other.

When an individual is made bankrupt all of their property passes to the Trustee in Bankruptcy (“TiB”), subject to certain exceptions. One of those exceptions is where property is held on trust for another. If X is made bankrupt therefore, its legal interest in the lease would not pass to the TiB, but would remain with X because X holds the property on trust for Y.

A TiB has the power to ‘disclaim’ (bring to an end) any onerous property obligation but this only applies to property which is held by the TiB. As the legal interest in a lease where there are two tenants cannot pass to the TiB because it is trust property, the power to disclaim the bankrupt’s legal interest in the lease does not apply.

In the recent case of Abdulla v Whelan (2017) the court was asked to decide whether a bankrupt joint tenant under a lease was liable for rent payments for the entire lease term, notwithstanding the bankruptcy.

If the bankrupt (B) was, then the landlord could claim in the bankrupt’s estate for all of the rent which accrued for the entire duration of the term rather than just the rent that was due up to the date B was made bankrupt.

Facts

In the Abdulla case, a creditor of B argued that the spirit of the bankruptcy regime envisaged a situation where a bankrupt joint tenant would be released from all of its obligations under a lease, including the obligation to pay rent. Accordingly, it was argued b the creditor, the TiB did have the power to bring B’s obligation to pay rent under the lease to an end before the end of the lease term.

As a side point, the reason that a creditor of B would argue this point is because, if the landlord was entitled to claim in the bankruptcy for the entire rent for the duration of the lease, rather than just that had accrued up until the date of B being made bankrupt, this would significantly reduce the pay-out which the other creditors received from B’s bankrupt estate.

Decision

The Court decided in favour of the landlord and said that, because the obligation to pay rent is a legal obligation, flowing from the legal estate, a TiB does not have the power to bring it to an end and it continues notwithstanding the fact that B has been made bankrupt.

Accordingly, B was liable for the rent for the entire duration of the lease term, notwithstanding the bankruptcy order against B.

Conclusion

This provides valuable clarification on how a lease held by two individuals as tenant is treated when one of those individuals is made bankrupt.

It is good news for landlords who have legal support when they wish to claim for the entire rent in the bankrupt’s estate, rather than just the rent which has fallen due and is unpaid as at the date of the bankruptcy.

It is important to note that the beneficial interest of the bankrupt in the lease, even when held jointly, can be disclaimed but that is not the subject of this note.

Moreover where there is only one individual comprising the tenant, the legal interest will be able to be disclaimed. Accordingly, a landlord will not be able to claim in the bankrupt’s estate for all of the rent due under the lease up until the end of the contractual term.

For further information on the relationship of property law and insolvency law, please contact Alexandra Withers, an Associate in our insolvency department at ajw@srflegal.co.uk or Chris Morgan, a Solicitor in our commercial property department at chris.morgan@srflegal.co.uk.

#lease #tenant #property

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Modifying restrictive covenants – a potential life-line for developers?

Overview

Whenever a housing development (or indeed any development) is in the offing, one of the first questions the developer has once it has found a potential site is whether there are any restrictive covenants against the site which could prevent it from proceeding with the development.

However, the existence of such a covenant is not necessarily fatal to the development. Restrictive covenants can be modified or removed altogether with the agreement of the party who has the benefit of them, usually in return for a monetary payment.

If no agreement can be reached, the courts have discretion to modify or remove a restrictive covenant if it is in the public interest to do so. This involves a balancing act between the rights of the beneficiary in maintaining the restrictive covenant and the public interest in modifying/removing it.

This was the focus of the recent decision of Millgate Developments Limited v Smith (2016).

Facts

Millgate was (and is) a property developer which proposed to develop a housing estate on land owned by Smith and on land which Smith had donated to a cancer charity (collectively “the Development Site”).

There were restrictive covenants against the proposed Development Site which prevented it from being used for buildings or for any other purpose other than a car park. Proceeding with the development without dealing with the restrictive covenants would therefore put Millgate knowingly in breach of them.

Millgate decided to proceed with the development anyway and 13 social houses were built on the Development Site in breach of the restrictive covenant.

Millgate approached Smith and the charity and offered £150,000 plus costs if they would agree to modify the restrictive covenants to allow the development. They both refused so Millgate applied to court (upper lands tribunal) for the restrictive covenants to be modified.

Decision

Notwithstanding that Millgate knew of the effect of the restrictive covenant before the development began, the tribunal agreed with Millgate that the restrictive covenants should be modified to allow the social housing to be occupied.

This decision was particularly important to Millgate because Millgate was not permitted to sell other non-social housing on its development without the social housing being occupied first.

The tribunal decided that:

·       the charity did have a substantial right in maintaining privacy for its patients and that preventing the development by refusing to modify/remove the restrictive covenant was a means of achieving this privacy;

·       the charity’s right was trumped by the public need for social housing and in particular the fact that in this case those who would occupy the social housing had been waiting for a long time;

·       the loss of privacy by modifying/removing the restrictive covenant could be dealt with by Millgate paying £150,000 to the charity. The charity could then use part of this money to plant a boundary to maintain some privacy;

·       the charity was not allowed to share in Millgate’s profits, only compensation for the loss of the restrictive covenant.

Conclusion

This decision appears to offer a way-out to developers who find themselves in a situation where restrictive covenants could prevent development. This is so even where the developer proceeds in the full knowledge that it is in breach of restrictive covenants.

However, the limits of this decision should be recognised:

·       the tribunal was at pains to say that it was not inclined to reward parties who deliberately flout their obligations, as Millgate had done in proceeding with the development knowing it was in breach;

·       the tribunal said it was “highly material” to its decision to modify/remove the restrictive covenant that the buildings built on the Development Site in breach of the restrictive covenants were intended to be social housing;

·       the fact that, before the application was made, Millgate had offered £150,000 to Smith and the charity was also important in the tribunal’s decision.

Accordingly, this decision may be seen as the exception rather than the rule but it will offer a life-line to developers particularly where the houses to be built, or which have been built, in breach of a covenant are social houses.

Short Richardson & Forth have acted, and continue to act, on a range of housing developments both in the North East and nationally. For further information please contact Paul Earnshaw, Head of Commercial Property at paul.earnshaw@srflegal.co.uk or Chris Morgan at chris.morgan@srflegal.co.uk, a solicitor in the property department, for further information.

#propertydevelopment #restrictivecovenants

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Cosmetic Warriors’ war on valuing of shares

A recent Court of Appeal case, Cosmetic Warriors Limited and Lush Cosmetics Limited v Gerrie (2017), exposed the consequences of omitting from a company’s Articles of Association wording about how an independent valuer is to go about valuing shares when pre-emption rights on share transfers are triggered. “Pre-emption rights” generally mean that existing shareholders have the right of first refusal if a shareholder wishes to transfer their shares so that the existing shareholders can retain the same level of control in a company. “Minority shareholders” are shareholders who do not have a significant degree of control over a company therefore owing only those shares without more does not give the shareholders much decision making power in the company

Cosmetic Warriors Ltd is the owner of the "Lush" brand's intellectual property rights. Lush Cosmetics Ltd is involved in the manufacture and sale of the cosmetics under licence from Cosmetic Warriors.  Mr Gerrie and his wife (“the Gerries”) were minority shareholders of both Cosmetic Warriors Ltd and Lush Cosmetics Ltd together with another husband and wife couple.  The relationship between the two couples broke down in 2014 resulting in the Gerries wanting to transfer their shares in the company. This triggered the pre-emption provisions of the articles.  The price for the shares could not be agreed by the shareholders, which, under the Articles of Association, meant that the price to be paid was to be determined by independent accountants.  A Part 8 claim was then issued for clarification on six agreed issues relating to the valuation and transfer of the shares.

The six issues

1.       The basis of valuation - The company argued that the valuation of the price for the shares should be on the basis of what might be achieved for a transfer of that block of shares having regard to, among other things, the status of the Gerries as minority shareholders, if and insofar as the accountants considered that a willing buyer and willing seller of that block of shares would consider the same to be material. The Gerries argued that the valuation should the on the basis of a pro rata proportion of the value of the whole equity of each company (i.e. not taking into account that the sellers were minority shareholders).

2.       The valuation of tranches – This issue did not arise on appeal.

3.       The provision of information to the accountants – The company argued that the accountants' valuations should be conducted on the basis of publicly available information only. The Gerries argued it should be on the basis also of such further information available and relating to the company as the accountants may request from them.

4.       The provision of information to third party transferees – The company contended that a potential buyer of the Gerries’ shares was to be provided with publicly available information only. The Gerries contended that the buyer was to be provided with such further information available and relating to the company as the potential buyer may reasonably request, not just that which was publicly available.

5.       The classes of third party transferees – The Articles of Association stated that a seller of shares could sell them to "any person". The company argued that this meant that a buyer could only be a natural person (i.e. an individual) , not another company. The Gerries argued that there was no such restriction and that the shares could be sold to a company.

6.       The liability for fees and expenses – The company claimed that liability for the fees and expenses of the accountants in valuing the shares was the responsibility of the Gerries. The Gerries argued that liability is to be shared between them and the company.

The company, having lost during the first hearing appealed to the Court of Appeal. The Court of Appeal however favoured the Gerries’ arguments in relation to issues 1, 3, 5, and 6. The Gerries also succeeded in substance on issue 4. Issue 2 did not arise.

Comment

This case highlights the need for companies to be clear when drafting Articles of Association and in particular in relation to share valuations. A failure to do so could lead to disputes going forward which can be costly, both in time and money. Detailed drafting of the Articles of Association, and other company documents (such as a shareholders’ agreement) at the outset when the relationship between the various shareholders is often positive can save more expense down the line.

The Court of Appeal affirmed the judgment of the High Court and gave a decision on the true construction of shareholders’ rights of pre-emption contained in the articles of association of the company.  It also concluded that a clause entitling the company to transfer shares to “any person” did not exclude transfer to a corporation.

If you would like advice on drafting Articles of Association or other company documents, or if you require advice on how to assess the basis of share valuations, please contact Chris Morgan, a solicitor in the corporate department.

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Directors’ liability: how far does it go?

In the recent case of Housemaker Services Limited v Cole & Another, the Court considered the Limitation Act 1980 and non-party costs orders.

Facts

The claimant company was a limited company acting by its director, W.  W entered into an oral agreement to provide building services to the Defendants.

The claimant company issued invoices to the Defendants on a number of occasions during 2008, 2010 and 2011. The invoices were not paid and the claimant company considered bringing a claim against the Defendants in respect of the unpaid invoices.

The claimant company were struck off the register on 18 November 2014 after the Registrar of Companies issued a notice pursuant to s 1000 Companies Act 2006.  W was unaware of the notice of striking off.  Although service of the notice was technically sufficient as it went to the registered office of the claimant company and to W’s known home address, W no longer resided at that address and was not forwarded the letter.

Upon W finding out that the claimant company had been struck off, W made an application on 6 July 2016 to the court for administrative restoration to the register and as such the claimant company was restored to the register on 18 July 2016.

W and his solicitors were aware of the limitation deadline of six years and as such particulars of claim were drafted and finalised by 12 July 2016.  Despite their knowledge, a claim was not filed until 12 December 2016 and was not sufficiently served upon the Defendants nor their solicitors until the New Year.

This meant that the claimant company’s claim was outside of the relevant limitation period under the Limitation Act 1980.

Submissions

The claimant company submitted that the court should discount the limitation period for the 608 days that the claimant company had been struck off.  The application was unsuccessful and the judge held that the dissolution had not been the cause of the failure to issue proceedings prior to the limitation period expending.

The Defendants’ made an application, only one business day prior to the hearing, for the sole director of the company to be joined as a second claimant in order for a costs order to be made against him personally.

The Defendants submitted that the claimant company had been “merely a legal construct” for W’s business and that they were one in the same.  The Defendants submitted that the W’s actions had led to the claimant company being dissolved in the first place and that he would benefit from any successful claims.  The Defendants also submitted that the claimant company had no assets and would be unable to satisfy any order for costs.

Decision

The order as to costs was not made against W.  The court held that it was not a case in which W’s actions were focused on controlling, funding and benefitting from the claim being made by the claimant company beyond that of an ordinary shareholder or director.  The court also highlighted that the claim had been brought in good faith although out of time.

The court therefore ordered that the claimant company pay the Defendants’ costs.

Comment

This case highlights that there is a high threshold in relation to costs orders being made against third party directors unless it is evidenced that the director is controlling, funding and benefitting from a claim made outside the ordinary realms of a shareholders and/or directors duty and/or it was brought in bad faith.

The decision reiterates that there is a separation of a company as a legal entity and the directors that may fund and benefit from the success of the company which protects the position of security for directors in relation to the company’s liabilities. Without this protection, directors would be made a defendant in any and all claims to provide security for successful parties should the company itself have no assets.

For more information please contact Alexandra Withers.

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Administrators: are you settled in the knowledge of the powers available to you?

In the recent case of Re Nortel Networks UK, the Companies Court considered administrator’s powers to agree to settle or compromise.

Facts

The Nortel Group was a multinational telecommunications and data networking equipment manufacturer with 130 subsidiaries in more than 100 countries.  The group collapsed in 2009.

The collapse left the pension funds in the UK and the US as the two largest creditors.  Realisations were made in the amount of US$7.3b, however collectively the Group were unable to agree as to how the realisations were to be distributed.

There were numerous negotiations and several mediations before an agreement was made in the form of a global settlement agreement.

The global settlement had four principal features:

1.      The settlement of the Lockbox allocation dispute.

2.      The settlement of certain UK pension claims.

3.      The settlement of various claims between the 19 companies in administration themselves.

4.      The settlement of certain claims relating to one of the French entities.

The agreements had been executed but would not become effective until there was approval of the Court to implement.

The administrators of 19 entities within the Nortel group made an application for directions under paragraph 63 Schedule B1 Insolvency Act 1986. This application was filed in order for the Court to give the administrators liberty to implement the global settlement of the vast majority of the group’s claims.

The administrators set out that the benefits of the global settlement agreement were the avoidance of the litigation risk in relation the Lockbox dispute, the avoidance of risk that the US and Canadian courts may reach a deadlock in respect of allocation of the Lockbox monies, a good return for creditors and a return to creditors sooner than the continuation and conclusion of certain claims.

Decision

The Companies Court granted the application allowing the administrators to implement a global settlement of disputes arising from the collapse of the group.  It was held that the settlement was in the best interest of the 19 companies as well as their respective creditors.  In addition to allowing the application, the Companies Court stated that the administrators have the power to enter into settlements without recourse to the courts but that due to the exceptional circumstances of this case and the great nature of the decision, the Court decided to approve and authorise the global settlement agreement.

The Court set out that they will provide directions to an administrator in respect of the power to settle or compromise where:

1.      There is a particular reason for doing so (as the administrator is generally expected to exercise his own judgment without seeking approval from the court).

2.      An administrator has exercised his own judgment and has decided that a settlement or compromise is in the best interests of creditor but where the settlement or decision is a particularly momentous decision.

3.      The proposed course of action is within the administrator’s powers but he requires approval of the court.

4.      The administrator holds the view that the proposal will be for the benefit of the company and its creditors.

5.      The administration is acting rationally and without any conflict of interest.

The Court also held that they would not give their approval if there is any doubt in the propriety of the proposed course of action as such approval would prevent a creditor challenging the decision.  In this case, the administrator must produce all relevant material to the court alongside a statement of his reasons for the course of action.

The Court stated that it should not withhold its approval on the basis that it would not have exercised the power in the way proposed by the administrator.

Comment

The above case confirms that administrators have the power to enter into settlement agreements and compromises without recourse to the court but that where a decision is momentous, administrators have ability to reach out to the court for directions.

Administrators should already be aware of their own power to settle or compromise but this case provides welcome confirmation that the court is open and available to administrators should they need guidance on a particularly difficult, complex or large settlement.

For more information please contact Alexandra Withers.

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Information Commissioner’s Annual Report and Financial Statements 2016/17

The Information Commissioner’s Annual Report 2016/17 highlights the fact that during 2017-18, the Information Commissioners Office (ICO) faces the challenge of not only maintaining its performance in processing work arising from its current responsibilities under the Data Protection Act (DPA), but must also prepare for major changes to its data protection work with the introduction of the General Data Protection Regulation (GDPR) in May 2018. This new regulation represents a major change in data protection legislation which will have a large impact, not only on the duties and responsibilities of data controllers and the rights of individual citizens, but also on how the ICO works as a regulator.

The Information Commissioner for the United Kingdom, Elizabeth Denham said –

“As the laws we regulate change, there is an opportunity for us to improve the trust that the public feel in those who process their personal data or who make information available to the public.”

The 2016/17 Annual Report focuses on the ICO’s overall productivity for data protection, freedom of information and self reported breaches under the current DPA. The Report makes clear that work is up on last year with data protection closures in particular increasing by 1,637 (10%). Freedom of information, written advice and enforcement work also continued an upwards trend.

This year saw a significant increase in the number of data protection concerns brought to them with over 18,300 cases received; about 2,000 more than last year. Of these they have resolved more cases than ever before, closing over 17,300. Impressively, 90% of cases were resolved within three months of receipt!

The ICO also issued more civil monetary penalties for breaches of the Privacy and Electronic Communications Regulations (PECR) than ever with 23 penalties totalling £1,923,000 covering a range of unlawful marketing activities. One of the largest was for £270,000, served on Road Traffic Consult for making 22 million unsolicited automated marketing calls to members of the public.

Ms Denham, Information Commissioner expresses within the report that;

“The digital economy is very important to the UK – personal data and how it is handled is central to trade and growth and studies show the digital economy is growing 30% faster than the rest of the economy. Data knows no borders.” 

Andrew Swan, Head of Regulation and Financial Crime at Short, Richardson & Forth states:

“The Commissioner’s Annual Report makes for impressive reading and demonstrates the efforts that are being made to enhance the world of data protection.  We continue to see a rise in ICO enforcement activity and, as a firm, we have a dedicated team of solicitors to advise and assist clients in this difficult area”. 

A full version of the report can be accessed via the link below:

ICO Annual Report and Financial Statements 2016/17

If you would like advice on any data protection issues including the GDPR and how to prepare, please contact Andrew Swan or Sheila Ramshaw on 0191 232 0283 or at as@srflegal.co.uk and Sheila.Ramshaw@srflegal.co.uk respectively.

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Party Walls: Who decides – the court or your surveyor?

In the recent case of Lea Valley Developments Ltd v Derbyshire, the court considered their jurisdiction in relation to the Party Walls etc Act 1996.

Facts

Lea Valley was a subsidiary for a not-for-profit local housing provider and the defendant was a freeholder of a property which had been converted into six flats.  In 2014, Lea Valley entered into a JCT Design and Building contract to construct 12 houses adjacent to the defendant’s property. 

Lea Valley had to serve a notice of excavation works under section 6 Party Walls etc Act 1996 and the parties appointed surveyors to review the works.  Section 7(2) states that Lea Valley would have to compensate the defendant for any loss or damage connect with the work.

There was severe damage to the defendant’s property so much so that the tenant had to vacate it.  Lea Valley accepted that the damage had been caused and accepted that the property would have to be demolished and rebuilt.

The defendant brought a number of claims against Lea Valley including compensation claims to cover the loss of rent.  However, this particular hearing was in relation to the cost of demolishing and rebuilding the defendant’s property and how any such compensation should be assessed.

The defendant’s surveyor set out that the estimated costs of the project would be £1.95m.  Lea Valley disputed this figure and argued that the compensation should be determined in relation to the diminution in value of the property as a result of the damage, which in its view would be somewhere between £488,000 and £1m.

On 21 February 2017, Lea Valley issued a Part 8 claim requesting that the court make a declaration that compensation should be assessed by reference to the diminution in value of the property.

The defendant informed Lea Valley that they would be requesting a stay.  The defendant should have filed an acknowledgement of service by 10 March 2017 but they did not do so until 21 March 2017.

Decision

The court had to consider whether (1) the defendant should be granted an extension of time for filing the acknowledgement of service, and (2) the court lacked jurisdiction to hear or determine the claim, or if it did not, whether the claim should be stayed for a surveyor’s decision.

In relation to the jurisdiction issue, the defendant argued that assessment of compensation was a matter for the surveyors to determine, as set out in section 10 which states that such a dispute "shall" be settled by surveyors, and that the court had no jurisdiction to determine the value to be awarded.  Lea Valley submitted that the court were able to determine the correct level of compensation as they have an inherent jurisdiction.

The court held that they have an inherent jurisdiction to provide declaratory relief under Senior Court Act 1981 and CPR 40.20.  Despite the defendant arguing that the Party Walls etc Act 1996 provided a code that ousted the court’s jurisdiction, the court held that in order for the court’s overriding jurisdiction to be ousted there had to be clear wording stating to that effect.  The court also held that the defendant had been aware of the claim since 21 February 2017 and that both the defendant and Lea Valley were aware of the fact that Lea Valley was going to dispute the claim.  However, the court granted the defendant relief from sanction after considering the defendant’s delay determining that the breach was not serious and that it had not prejudiced Lea Valley.

The court held that the relief Lea Valley sought was narrow and could be determined via a short court hearing.  The court held that in order to determine the compensation award, the court would have to consider whether the claimant’s obligation should be calculated in relation to diminution in value or through the cost of reinstatement.

The court held that they would not be determining the amount of compensation but that they would identify the correct test and the surveyors would determine the compensatory award themselves.

Comment

This case sets out the court’s jurisdiction in relation to determining party wall disputes and also emphasises the court’s powers in relation to relief from sanction.  Parties can be confident that they are able to apply to the court to determine narrow matters and do not have to use a surveyor for such matters.

For more information please contact Alexandra Withers.

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Bombarding the court with applications to vary

In the recent case of Bombardier Transportation UK Ltd v Merseytravel, the Technology and Construction Court considered the application of Bombardier to vary a consent order due to a tenderers entitlement to fully investigate comparative treatment of tenders and concerns.

Facts

Bombardier had put in a tender to supply Merseytravel with rolling stock and other services.  Bombardier were unsuccessful in their tender and alleged that their tender had not been treated in the same was as that of the successful company, Stadler.

Bombardier and Stadler are two of a group of tenderers who regularly compete against one another for major contracts around the world.

In February 2017, consent orders were entered into and approved by the court which provided for the creation of a confidentiality ring.  This confidentiality ring included Merseytravel, Bombardier, Stadler and a number of other tenderers to provide for the exchange of information during the procurement process.  The orders specified individuals to whom confidential information and highly sensitive information, which included details of the successful tender, could be disclosed.  The confidential information was to be supplied electronically however only lawyers could view the documents in that form and non-legal consultants were to review it in hard copy.  The information deemed to be highly sensitive was only to be disclosed in hard-copy form and non-legal consultants were not entitled to review it at all.

In March 2017, Bombardier made an application to the court to vary the terms of the February 2017 consent orders dealing with the disclosure of confidential information and highly sensitive documentation.  The application gave rise to a number of issues for the court to consider.

The court had to determine whether:

1.       The court should permit major amendments to a consent order so soon after the parties agreed to the terms.

2.       The full group within the confidentiality ring should be permitted to review both the confidential and highly sensitive information.

3.       Bombardier’s global services project manager should be added to the confidentiality ring and be permitted to review both sets of information on behalf of Bombardier.

4.       The highly sensitive information should be disclosed in electronic format at Bombardier’s solicitor’s offices.

5.       Bombardier’s application was bona fide or whether it was a tactical attempt to gain access to highly confidential information. 

The court held that parties were entitled to apply to vary consent orders where practical difficulties had since become apparent, and that in this case Bombardier had put forward a prima facie case that not only could all those in the confidentiality ring review the confidential information but the highly sensitive information as well.

The court did not agree that Bombardier’s global services project manager should be added into the confidentiality ring as they believed that the risks outweighed Bombardier’s aims and requirements.  The court did however set out that if Bombardier’s external consultants were unable to fulfil their requirements then they were entitled to renew the application.

The court could see no reason why the highly sensitive information should not be disclosed in the same electronic format as the confidential information nor why the highly sensitive information should not be held in the same manner as the confidential information.

The court held that Bombardier’s application was bona fide and was an application made to aid them in reviewing Merseytravel’s procurement process in full details.

Comment

This case highlights that even where consent orders have been approved by the court, applications to amend or vary can be made where it is practical to do so.  Consent orders should be varied where it is found that they will cause practical difficulties to the parties.

The courts are aiming to give practical business efficacy to business contracts and processes without causing a barrier to those parties deemed to have lesser bargaining power.

For more information please contact Alexandra Withers.

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Judicial reviews – the importance of playing by the rules

In the recent case of R (Merida Oil Traders) & R (Bunnvale Limited) & Others v Central Criminal Court and Others (2017), the court considered two judicial reviews concerning breaches of disclosure orders and a number of other matters.

What is judicial review?

Judicial reviews are the assessment of the legality of decisions made by public authorities or bodies.  The decision is brought before a judge in court proceedings and is tested.  The main purpose of judicial review is to ensure that public authorities do not act in excess of their powers.

Facts

Two judicial review claims were brought before the High Court.  The claimant in the first action was Merida Oil Traders, and the first claimant in the second action was Bunnvale Limited.  Merida and Bunnvale were both companies incorporated in the British Virgin Islands and traded in energy contracts on the Intercontinental Exchange (ICE).  The trading was conducted via a broker, Archer Daniels Midlands Investor Services International Limited (ADM).  The second claimant in the second action was TICOM, a Russian company affiliated with Bunnvale.  TICOM had an agreement with ADM which allowed it to receive commissions on transactions undertaken by ADM for clients introduced by TICOM.

In May 2015, the ICE made a suspicious transaction report to the FCA concerning the trading activities of Merida, Bunnvale and another company, Intoil SA.  The concern raised by the ICE was that the trading was indicative of fraud as Bunnvale appeared to be making money on all of its transactions with Merida and Intoil. 

In February 2016, the City of London Police began investigating the activities.  As a result of the investigation, ADM stated that it wished to terminate its relationships with the companies and obtained the consent of the National Crime Agency and the police to liquidate the trading positions of the companies.

Bunnvale and TICOM requested that the monies held in their accounts should be returned and ADM stated that it was unable to do so.  In April 2016, Bunnvale made a further demand and ADM sought consent from NCA and police to pay the closing balances.  This consent was refused.

In April 2016, the police stated that a court order could be applied for for the production of cheques relating to the companies.  ADM agreed to prepare the cheques.

On 4 May 2016, the arrangements for the creation and production of cheques for the balances payable were confirmed in an email from the police to ADM.  The closing balances were:

·         US$ 13,431,590.26 – Bunnvale trading account

·         US$ 2,819,328.12 and US$781,313.01 – Merida trading accounts

·         US$ 4,690,429.41 – Intoil trading account

·         US$ 131,958.57 – TICOM trading account

On 6 May 2016, orders under section 345 Proceeds of Crime Act (POCA) were issued which required ADM to provide the police with materials relating to the five accounts and cheques in the amount set out above.

On 9 May 2016, the police sent emails to the four companies with a written application which was to be heard the following day.  The application for under section 295 POCA requesting continued detention of the monies.

On 10 May 2016, without the attendance of the four companies due to emails not being seen and attendance at the wrong court, an order was made to allow the continued detention of the monies for six months.

The claimants challenged the entire procedure under which the cheques were ordered, produced, seized and detained.

Proceedings

The court stated that there were a number of issues that needed to be addressed.  These issues were:

1.       Were the statutory requirements for making production orders met?

2.       Were the cheques lawfully seized?

3.       Were the production orders sought for a lawful purpose?

4.       Were the detention orders lawfully made?

5.       Was there procedural impropriety in obtaining the production and detention orders?

6.       What relief, if any, should be granted?

 1.       Were the statutory requirements for making production orders met?

The police used a standard form to make the production order.  The police identified the investigation as a money laundering investigation and named the four companies.  The central issued raised was that the claimants believed that the cheques added no “substantial value to the investigation” and that the defendants had no reasonable grounds for believing that there would be any substantial value added to a money laundering investigation.

The court held that there was no power to make the production orders in relation to the cheques which were in the possession of ADM.

2.       Were the cheques lawfully seized?

The defendants stated that even if the court had held that the production orders were unlawful, that the seizure of the cheques produced by ADM was nevertheless lawful as the power under section 294 was a freestanding power.

The claimants argued that the seizure was unlawful as it was contrary to the intent and scheme of the legislation and a misuse of the power within section 294.

The court did not agree with the defendants and held that section 294 did not authorise the police to seize the cheques made payable to the claimants by ADM.

3.       Were the production orders sought for a lawful purpose?

The court held that the power contained in section 294 POCA did not extend to seizing cheques made payable to the claimants.  They stated that for the same reasons the production orders were unlawful under section 345.

4.       Were the detention orders lawfully made?

As the court had held that the production and seizure of the cheques had been unlawful, the detention orders were held to be unlawful.  The court gave two reasons for this:

a.       Section 295 POCA “only permits cash to be detained where its seizure was lawful”.

b.      It was inconsistent with the scheme and purpose of the legislation to “use section 295 to detain cash which only exists in that form because the money has been converted into cash at the instigation of the police…without the knowledge of the person to whom the money belongs or is owed”.

5.       Was there procedural impropriety in obtaining the production and detention orders?

The claimants made two criticisms of the procedure by which the orders were obtained.

a.       The claimants were not notified of the application.

b.      The police were in breach of the duty of disclosure owed by a party who makes an application without notice.

The court held that both criticisms were valid as in the “basic principles of natural justice…an order should not be made which affects a person’s rights without first giving the person an opportunity to be heard” and that where such an application is made without notice, it is a firmly established principle that “the applicant must make full, fair and accurate disclosure of material facts to the court”.

6.       What relief, if any, should be granted?

The court held that the production orders made requiring ADM to produce to the police cheques which they had drawn at the request of the police were unlawful because:

a.       The production of the cheques was not sought for the purpose of the money laundering investigation and there was not reasonable grounds for believing that the cheques were to be of any value to the investigation.

b.      The planned seizure of the cheques was unlawful.

c.       The production of the cheques were made through an improper procedure.

The court determined that both the production and detention orders should be quashed but that they would allow a stay of their order to allow the police time to decide whether or not to take civil recovery proceedings.

Comment

Practically this case emphasises that parties need to ensure that they are acting within the confines of the legislation and are not pushing the boundaries as this could leave them with unnecessary costs and time wasting when orders and applications are overturned.

Alongside this, parties should comply with the relevant practice guides and ensure that they are complying with any expected disclosure and deadlines to show the court that they are taking the matter seriously and with care.

The case emphasises the importance of judicial reviews where parties are left with incorrect decisions made by the prior courts who had failed to apply legislation correctly.

For more information please contact Sarah Farish.

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The perils of property with Japanese knotweed

In the recent case of Waistell v Network Rail Infrastructure Limited, the court considered a claim for damages arising from the existence of Japanese Knotweed on a neighbour’s land.

Japanese Knotweed

Japanese Knotweed is a strong bamboo-like plant that grows incredibly quickly.  The plant can spread underground via its roots and can cause damage to property and paths.  Purchasers of properties in the vicinity of Japanese Knotweed can have trouble being granted mortgages.  As a result, sellers can have trouble selling a property that is affected by Japanese Knotweed.  RICS set out in their Information Paper from 2012 that the affected radius is seven metres.

Waistell v Network Rail Infrastructure Limited

The claimants owned neighbouring semi-detached bungalows in South Wales and the defendant owned an access path behind the bungalows as well as an embankment where a large amount of Japanese Knotweed had been growing for around 50 years. The defendant had been aware of the plant since 2008 as it was found during a track inspection and had been controlling the weeds to maintain visibility on the line.

The claimants argued that the defendant was liable for the plant’s encroachment on their land and that the presence of the plant was an interference with their quiet enjoyment of their properties and had caused the value of their properties to decrease.

The claimants were not successful in proving that the plant caused damage to their properties.  However, they were successful in providing that the presence of the plant had devalued their properties and that even if the plant was treated and controlled the value would still be lower than that of market value.

The court held that he defendant had constructive knowledge of the risks associated with Japanese Knotweed and that the defendant had failed to properly carry out their obligation as the landowner to deal with the plant – whether to dispose of the plant completely or to the control the spread of the plant.

The court awarded the claimants £15,000 in damages in respect of the diminution in the value of their properties and to cover the costs of treating the knotweed affecting their properties.

Comment

Usually damages for a claim of nuisance are only awarded where the claimants have suffered actual damage to their property rights, however the decision in Waistell allows for a claim to be successful even where there has been no physical damage to properties.

The judge set out that a claim for nuisance could be successful despite the actual nuisance not being on the claimants’ land.  It will be interesting to see how wide the courts apply or consider this case or whether it will be considered only in relation to cases involving Japanese Knotweed.

The decision in this case will likely lead to an increase in similar cases where Japanese Knotweed has been left untreated.  Claimants will be able to claim for (1) the costs of removing the Japanese Knotweed or a court order requiring the defendant to remove the plant, (2) the costs for any building/repair works to be made to the claimant’s property as a result of the Japanese Knotweed and (3) the diminution in value to the claimant’s property due to the plant.

What should we do now?

Practically, landowners are left with the onus of removing, treating and dealing with the plant.  As such any landowner with knowledge that the plant is growing on their land should ensure that they deal with or remove it as set out in the regulations.

The decision in Waistell is not a binding one but may allow affected property owners to rely upon the decision to prove their own cases.  It will be interesting to see whether Network Rail Infrastructure Limited appeal the decision and run the risk of making the decision binding if they are unsuccessful upon appeal.

For more information please contact Sarah Farish.

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Champerty or Championing

Champerty used to be the illegal act incurred by a person maintaining legal action for a share of the proceedings where the supporter has no legitimate concern, without just cause or excuse.  This was illegal in order to protect the justice system from abuses.

The modern take on champerty is based in public policy considerations and as such the application of champerty has been lessened.

It used to be that conditional fee agreements (CFAs), also known as no win no fee agreements, would fall foul and be deemed immoral.  This of course is no longer the case.  Similarly, the courts are now much more willing to allow third party funding to allow claimants to gain access to justice that they would not have had if it were not for the third party funders.

There is now an interesting debate on the introduction of crowd funding to finance a claim.

Crowd funding is usually related to the starting up of small businesses and the development of new technologies; however in recent years, there has been an increase in litigation crowdfunding platforms.  These platforms are an alternative to private funding and third party funding.

Launched in May 2015, CrowdJustice is an example of such a platform.  CrowdJustice’s objective is to create “a funding platform where you can come together with your community to build support and share the costs of taking legal action for issues that affect your community”.  The platform does not assess the merits of the cases they market as they believe they are merely facilitators to access to justice.  The platform can be used to raise funds for legal fees, court fees, disbursements, adverse costs and numerous other legal fees.

Those that pledge to give a donation to the funding of a case will not receive any funds back unless there are exceptional circumstances including there being surplus funds.  There is therefore no benefit to those that pledge other than helping fund a case and raise awareness in relation to it.

CrowdJustice do not stipulate that there is a certain type of case that will be taken on however they do state that there must be:

·         A lawyer instructed on the matter

·         A person who is passionate about their case

·         Enough time to raise funds

·         A community or network who will aim to support the case.

The latter is seemingly the most important point.  Unless there are people willing to support your case, there is no way that this process will benefit a claim.

In Excalibur Ventures LLC v Texas Keystone Inc and Others, it was held that professional funders (who receive payments where claims are successful) are joint and severally liable for claims that they back and cost orders can be made on an indemnity basis.  As such, professional funders need to take into account the risks in backing a claim prior to doing so.

In the case of crowdfunding, the funders (1) do not have any input into or control over how the claim is conducted, (2) do not have any communication with the case owner, (3) do not receive anything in return for their donation, even if the claim is successful, and (4) do not have any access to the evidence nor how much is requested in damages.

It therefore follows that it would be highly unlikely that the court would enforce a costs order against ordinary members of the public who did not have anything to gain from the success of the claim other than promoting access to justice.

The court try to take a pragmatic approach to costs as without funding many claimants would be otherwise unable to bring a claim before the court. Further, where funder are not receiving anything in return for their funding it would be unjust to imply further obligations on funders.

The champions of access to justice are the everyday citizens pledging their hard-earned money to aid claims that they believe in.

For more information please contact Alexandra Withers.

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High Court grants relief to defendant for non-attendance

Background

Falmouth House v Abou-Hamdan concerns a dispute between the parties over service charges.  Falmouth House was the freehold owner of a building in West London, in which Mr Abou-Hamdan was a lessee of a flat.  In November 2013, Falmouth House issued a claim form against Mr Abou-Hamdan claiming more than £30,000 for arrears of service charges and contributions to a reserve fund.

Mr Abou-Hamden appealed against three orders made during the course of the litigation:

1.       With the trial originally listed for 20 April 2015, the judge on that day, HHJ Mitchell, made the first order re-fixing the trial date for hearing on or after 13 August 2015.  This order provided that if Mr Abou-Hamdan did not attend in person his defence would be struck out, and judgment would be entered for Falmouth House.  The trial was eventually re-fixed for 14 December 2015.

2.       On 10 December 2015, DJ Langley dismissed, Mr Abou-Hamdan’s application to be permitted to give evidence at the 14 December trial by video-link.

3.       At the trial on 14 December 2015, Mr Abou-Hamdan did not attend in person, but counsel did appear on his behalf, who applied for relief from sanctions for non-compliance with the Mitchell Order.  HHJ Saggerson refused this application, meaning that Mr Abou-Hamdan's defence was struck out, and judgment was entered in default for Falmouth House for just over £35,000.

High Court

At the High Court, the court considered whether, in refusing Mr Abou-Hamdan any relief from sanctions due to his failure to comply with the Mitchell Order, the County Court had applied stage one of the Denton test correctly.

As reported by SRF in our account of Phelps v Button, the ‘Denton Test’ sets out three criteria to decide whether relief should be granted to a party which has breached a court rule, practice direction or court order:

1.       Was the breach of the rule, practice direction or court order sufficiently serious?

2.       Is there a good explanation for the breach?

3.       Having mind of all the circumstances, is it just to grant relief from sanctions for the breach?

Outcome

In his opening remarks, Justice Nugee stated that there were two established and uncontroversial principles:

1.       That a party to a claim has a right to appear in person and represent himself at trial, but also has a right to be represented by counsel.

2.       A party is generally entitled to decide for themselves whether to give evidence or not.

With these two principles firmly accepted, there no reason why a defendant could not instruct counsel to appear at trial on his behalf, or decline from giving or calling evidence.

On the construction of the Mitchell Order, the judge held that requiring Mr Abou-Hamdan to “attend in person” should, on its natural meaning, be interpreted as requiring him to appear at court in London; neither appearing via video-link from Dubai or being represented by counsel in London constituted compliance with the order.  The Mitchell Order has undoubtedly been breached.

However, on the more important point of whether the Saggerson Order complied with the Denton tests, the judge held that the breach of the Mitchell Order was not serious or significant, as it did not put the trial date at risk.

The judge allowed Mr Abou-Hamdan's appeal against the Saggerson order, stating that the judge at first instance misapplied the first Denton test by finding that the breach of the Mitchell Order was serious and significant. The order was set aside, meaning that the case was left as one in which a trial had not taken place.  The judge left the parties to apply to the court for directions for the issues to be tried.

Conclusion

We can take two lessons from this interesting judgment.

Firstly, it is important when considering the seriousness of the breach of particular court order, to consider what the purpose of that court order was.  The Mitchell Order was intended to prevent the trial from being delayed and re-fixed a third time, and the judge at first instance would apparently have been satisfied for Mr Abou-Hamdan to attend on the first day of the trial and be absent from then on.

Secondly, Justice Nugee’s consideration of the fairness of the Mitchell Order (in an obiter section at the end of his judgment) shows the importance when drafting any ‘unless order’ (i.e. one which threatens consequences if certain action is not taken) assessing whether the order would be an appropriate and proportionate means of achieving the objective.

For more information please contact Alexandra Withers.

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High Court punishes oil prospectors for breach of injunction

Background

In Pan Petroleum AJE Limited v Winka Folawiyo Petroleum Co Limited & others, the parties were subject to a joint operating agreement formed in 2007 concerning oil exploration and drilling off the southern coast of Nigeria. This particular case concerns the granting of Oil Mining Lease No. 113, where wells 4 and 5 are currently operational, and wells 6 and 7 are ready for development.  The dispute centres on wells 6 and 7, and whether their development has been properly approved.

Pan Petroleum successfully obtained an injunction which prevented the defendants from exercising their rights under the lease, in respect of wells 6 and 7, to exclude Pan Petroleum from participating in, or voting at, meetings.

On 23 January 2017, the defendants held a meeting and gave Pan Petroleum a mere three minutes’ notice, and thus effectively excluding Pan Petroleum from attending or voting.  Pan Petroleum therefore argued that the conduct of the defendants amounted to a breach of the injunction, and brought an application that the defendants be held in contempt of court.

High Court

At the High Court, Justice Knowles was clear that the defendants’ actions would fall within the definition of the injunction in terms of Pan Petroleum being excluded from the meeting, but he had to consider whether this actually related specifically to wells 6 and 7, and thus would constitute a breach of the injunction.

The defendants argued that because in respect of had a narrower meaning in the lease, this same narrow meaning must be applied to the alleged breaching of the injunction.  The court however disagreed, stating that “it is the terms of the injunction which matter”.  If the injunction is wider than the defendants feels Pan Petroleum is entitled to, then the defendants should apply to vary it.  This was not the case here.

Outcome

The court stated that the resolutions passed at the meeting related to approval of budgets for the wells, rather than approving the actual planned work on the well.  However, on a ‘natural meaning’ of the words, excluding Pan Petroleum from a meeting relating to the budget of a well is exercising rights ‘in respect of’ that well (which was also prohibited under the injunction).

The court held that the meeting was therefore a breach of the injunction, and that the defendants were in contempt of court.  The judge invited further submissions as to the consequences of that contempt.

For more information please contact Tim Berg.

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How much is it actually worth?

In the recent case of Marathon Asset Management LLP and another v Seddon and another (2017), the High Court considered a claim against the first and third defendants for taking and using confidential documents.

Facts

Marathon carry on an investment management business.  A long-running dispute between the firm's three founders led to one of them leaving, followed by employees who worked with him.  Arbitration proceedings and the below litigation have ensued.  The arbitration claims were resolved and some of the claims made within the proceedings have been settled.  The remaining claims are against the first defendant (Mr Seddon) and the third defendant (Mr Bridgeman) for taking confidential documents.

Mr Bridgeman admitted that over a period of several months before he left Marathon’s employment, he copied onto USB drive a substantial number of confidential files.  Mr Bridgeman further admitted that by copying and retaining the files (until the proceedings were threatened) he was in breach of his contract of employment.  That left two issues in dispute:

1.      Was Mr Seddon liable for copying some of the files?

2.      What, if any, damages are payable by Mr Bridgeman and, if liable, Mr Seddon?

The first issue surrounded the purpose for which Mr Seddon shared a number of files containing confidential information about Marathon’s business with Mr Bridgeman.  Marathon submitted that Mr Seddon shared these files for Mr Bridgeman to add to the other files that he planned to keep.

In relation to the second issue, it was common ground that the files which Mr Seddon shared with Mr Bridgeman were never used after they left Marathon’s employment.  Mr Bridgeman used a few of the many files he had copied but there is no allegation that this caused any loss to Marathon.

Marathon’s case is that it does not matter that no loss has been shown but that the defendants unlawfully took confidential information and must pay for the value of what they took from Marathon.  Marathon estimated that this level of confidential information taken amounted to £15m.

Decision

The High Court determined that:

1.      Mr Seddon copied a number of file to a share drive with the intention that Mr Bridgeman would save them to a USB drive so that they would be available after Mr Seddon left Marathon.  The judge held that Mr Seddon “was seriously interested in the idea of starting up a new business with Mr Bridgeman”.

2.      Mr Bridgeman was in breach of his duties of “confidence owed to Marathon in contract” and under the general law in respects of (i) copying files containing confidential information for his own purposes, (ii) retaining said files for an extended period of time and (iii) accessing those files on a number of occasions.

3.      Mr Seddon was (i) in “breach of such duties in copying” the files to a shared drive and (ii) is jointly liable with Mr Bridgeman for breach of confidence “pursuant to a common design” 

Marathon contended that the appropriate measure of damages was £15m.  Marathon produced a report from a forensic accountant and in response, Mr Bridgeman served an expert report of his own.  Marathon’s report made calculations based at the time of the defendants’ leaving Marathon’s employment and ignoring hindsight.  The calculations came to a range of values between £2.5m and £39.4m.  Mr Bridgeman’s expert produced different calculations which ranged from US$200,000 and US$13.8m.

The overall range was therefore from US$200,000 to £39.4m which the High Court stated reflected the “inherent indeterminacy of the task”.

The High Court held that Mr Bridgeman had admitted liability and the court had found Mr Seddon liable for breaches of duties of confidence but that the court would reject the claim for “substantial damages”.  The High Court held that Marathon’s argument “fails to match the remedy to the wrong”.

The High Court stated that it was self-evident that the “general object of an award of damages for a civil wrong is to compensate the claimant for injury caused by the defendant’s wrongful act” and that where “no injury has been sustained for which Marathon is entitled to be compensated in damages” then “it is hard to see how Marathon could be entitled to any remedy other than an award of nominal damages”.

The High Court stated that Marathon had “missed the jackpot” and would only be entitled to nominal damages of “a sum of £1” for each case.

Comment

This case shows that although establishing liability may be clear cut, establishing loss can be less so.  Practically, when calculating loss, this case highlights that the best route to take is to understand the realities of the situation at hand.

It highlights how wide the range of valuations can be from the final amount ordered and how hard it can be to value the taking and usage of commercial documents.

There have been critics of the High Court decision who feel that the generally adopted position that the person who detains property belonging to another with the intention of making use of it should pay the equivalent reasonable hire price has somewhat forgotten about.  The judge had determined that the copying of electronic data does not deprive the employer of anything as they still retain the information themselves and that it is only when the employee utilises the data that the employer has suffered loss. It is well known that information can be worth substantial amounts of money and the importance of information is only being emphasised through the introduction of the new General Data Protection Regulation.

Interestingly, a similar case will be heard in the Supreme Court this year.  The Marathon judgment will likely be a useful tool for the Supreme Court however their decision will ultimately reflect the court’s understanding and expectations in relation to protecting information going forward.

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Modifying restrictive covenants – a potential life-line for developers?

Overview

Whenever a housing development (or indeed any development) is in the offing, one of the first questions the developer has once it has found a potential site is whether there are any restrictive covenants against the site which could prevent it from proceeding with the development.

However, the existence of such a covenant is not necessarily fatal to the development. Restrictive covenants can be modified or removed altogether with the agreement of the party who has the benefit of them, usually in return for a monetary payment.

If no agreement can be reached, the courts have discretion to modify or remove a restrictive covenant if it is in the public interest to do so. This involves a balancing act between the rights of the beneficiary in maintaining the restrictive covenant and the public interest in modifying/removing it.

This was the focus of the recent decision of Millgate Developments Limited v Smith (2016).

Facts

Millgate was (and is) a property developer which proposed to develop a housing estate on land owned by Smith and on land which Smith had donated to a cancer charity (collectively “the Development Site”).

There were restrictive covenants against the proposed Development Site which prevented it from being used for buildings or for any other purpose other than a car park. Proceeding with the development without dealing with the restrictive covenants would therefore put Millgate knowingly in breach of them.

Millgate decided to proceed with the development anyway and 13 social houses were built on the Development Site in breach of the restrictive covenant.

Millgate approached Smith and the charity and offered £150,000 plus costs if they would agree to modify the restrictive covenants to allow the development. They both refused so Millgate applied to court (upper lands tribunal) for the restrictive covenants to be modified.

Decision

Notwithstanding that Millgate knew of the effect of the restrictive covenant before the development began, the tribunal agreed with Millgate that the restrictive covenants should be modified to allow the social housing to be occupied.

This decision was particularly important to Millgate because Millgate was not permitted to sell other non-social housing on its development without the social housing being occupied first.

The tribunal decided that:

·         the charity did have a substantial right in maintaining privacy for its patients and that preventing the development by refusing to modify/remove the restrictive covenant was a means of achieving this privacy;

·         the charity’s right was trumped by the public need for social housing and in particular the fact that in this case those who would occupy the social housing had been waiting for a long time;

·         the loss of privacy by modifying/removing the restrictive covenant could be dealt with by Millgate paying £150,000 to the charity. The charity could then use part of this money to plant a boundary to maintain some privacy;

·         the charity was not allowed to share in Millgate’s profits, only compensation for the loss of the restrictive covenant.

Conclusion

This decision appears to offer a way-out to developers who find themselves in a situation where restrictive covenants could prevent development. This is so even where the developer proceeds in the full knowledge that it is in breach of restrictive covenants.

However, the limits of this decision should be recognised:

·         the tribunal was at pains to say that it was not inclined to reward parties who deliberately flout their obligations, as Millgate had done in proceeding with the development knowing it was in breach;

·         the tribunal said it was “highly material” to its decision to modify/remove the restrictive covenant that the buildings built on the Development Site in breach of the restrictive covenants were intended to be social housing;

·         the fact that, before the application was made, Millgate had offered £150,000 to Smith and the charity was also important in the tribunal’s decision.

Accordingly, this decision may be seen as the exception rather than the rule but it will offer a life-line to developers particularly where the houses to be built, or which have been built, in breach of a covenant are social houses.

Short Richardson & Forth have acted, and continue to act, on a range of housing developments both in the North East and nationally. For further information please contact Paul Earnshaw, Head of Commercial Property at paul.earnshaw@srflegal.co.uk or Chris Morgan at chris.morgan@srflegal.co.uk, a solicitor in the property department, for further information.