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When is hardball played too hard in the eyes of the Court?

27/03/2018 | Nick Leigh
The case of Al Nehayan v Kent The recent case of Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent (AKA John Kent) EWHC 333 (Comm) recounts the breakdown of a friendship as well as a

The case of Al Nehayan v Kent

The recent case of Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent (AKA John Kent) [2018] EWHC 333 (Comm) recounts the breakdown of a friendship as well as a business worth tens of millions of euros amongst acrimony, back-stabbing and even threats of personal violence. Yet it is made particularly notable by the judge’s comments on where the line should fall between the acceptable and unacceptable pursuit of commercial self-interest.

In 2008, Sheikh Tahnoon, an Abu Dhabi royal, and John Kent, a Greek businessman, entered into a joint venture [the “JV”]. Mr Kent had set up the Aquis group. Sheikh Tahnoon acquired 50% of Aquis Cyprus, the holding company, paying 4m euros, leaving Mr Kent owning the remaining 50%. The business purchased two hotels in Crete, along with the YouTravel website (via the purchase of Stelow Limited [“Stelow”], in which the Sheikh owned 60% and Mr Kent owned 40%).

In 2009, problems arose. Mr Kent sought cash injections from the Sheikh which meant that, by 2012, the Sheikh’s investment had ballooned to more than 31m euros. With the strain on the business causing a strain on their friendship, the Sheikh passed the matter over to his advisors, whose attempts to extricate their boss from the worsening financial problems included using Mr Kent’s fear that the business was about to fail as a means of getting him to sign a new agreement that left the Sheikh with the only assets of real value (the Crete hotels) [the “Framework Agreement”]. During the negotiations for the Framework Agreement, the Sheikh’s advisors made comments that Mr Kent took – and the Court found – to be veiled threats of serious physical violence against him if he did not sign up. Ultimately, the business failed anyway. Sheikh Tahnoon sued Mr Kent under the Framework Agreement for 15m euros. Mr Kent issued a counterclaim stating that the Sheikh had breached the fiduciary and contractual duties he owed Mr Kent under the original JV agreement.

Lord Justice Leggatt found that the Framework Agreement did not entitle Sheikh Tahnoon to the damages he sought. As well as concluding that Mr Kent entered into the agreement under duress (no great surprise in light of the threats of violence), the Judge also found that, whilst the Sheikh was not a fiduciary of Mr Kent’s, he nonetheless owed him a duty to act in good faith, and that by using Mr Kent’s fear that the business was about to fail as a means of extracting a better arrangement from the situation, the Sheikh (acting through his advisors) had breached this duty also.

The Judge found particularly egregious what he considered to be double-dealing by the Sheikh’s advisors in respect of FTI Touristik GmbH [“FTI”], a German tour operator that looked like it might provide help at a crucial juncture. Mr Kent spoke with FTI’s chief executive to discuss whether or not it (FTI) would be willing to accept delayed payment of sums it was owed by YouTravel. This evolved into a rescue plan for the JV, which would see FTI extend credit in return for two call options: one to buy the hotels in Crete for 40m euros (less liabilities) and the other to buy 40% of Stelow for £1. Mr Kent recommended to the Sheikh’s advisors that the FTI offer be accepted. However, whilst the Sheikh’s advisors did not oppose it, they would not agree to include in the Framework Agreement a clause that allowed Mr Kent to negotiate and conclude this deal. It was not until disclosure was provided by the parties in these proceedings that Mr Kent learned why: the Sheikh’s advisors were themselves negotiating with FTI at the same time without his knowledge, to sell them the Sheikh’s 60% shareholding in Stelow. Had the sale gone through, FTI would have become the majority shareholder, leaving Mr Kent still the minority. The judgment reports the Framework Agreement said that Sheikh Tahnoon “agreed to transfer to Mr Kent any remaining shares in Stelow once the “YouTravel solution” was concluded with FTI”, not that Mr Kent was sure to conclude the Framework Agreement as Stelow’s majority shareholder. Similarly, there is no reference to documents before the Court that precluded the Sheikh from entering into separate, secret negotiations with FTI in order to recover more of his money than he would otherwise receive. This did not prevent the Judge from finding this double dealing reprehensible, and a breach of a duty to act in good faith.

Was the Sheikh’s play hardball, but business is business? Or was Lord Justice Leggatt right to perceive such behaviour as being the untrammelled pursuit of his own best interests, which the Court had to prevent? This is not the first case in which the Judge construed the obligations between contractual parties as having, if not an actual fiduciary nature, then a wider obligation than may otherwise have appeared. In his judgment, he quoted from an earlier case of his, saying “[in Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB)] I drew attention to a category of contract in which the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract. Such ‘relational’ contracts involve trust and confidence but of a different kind from that involved in fiduciary relationships. The trust is not in the loyal subordination by one party of its own interests to those of another. It is trust that the other party will act with integrity and in a spirit of cooperation. The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith.”

In Al Nehayan v Kent, Lord Justice Leggatt acknowledges that his construction of the terms of the Framework Agreement involves “some fairly muscular manipulation of the wording”. Whether or not this amounts to steering the outcome of the proceedings in equally robust fashion, the direction of the Judge’s thinking is clear: the Court is within its powers to take a view on whether or not business really is just business. Players of hardball should keep this in mind.

TUPE – A silver lining for insolvent companies?

15/03/2018 | Noel Deans & Sean Field-Walton
On what some tabloids dubbed “black Wednesday”, 28 February 2018 saw both Toys “R” Us and Maplin fall into administration. Recent weeks have seen this saga play out further in the broadsheets

On what some tabloids dubbed “black Wednesday”, 28 February 2018 saw both Toys “R” Us and Maplin fall into administration. Recent weeks have seen this saga play out further in the broadsheets. Both companies have scrambled in search of potential buyers. Maplin’s search continues and thousands of jobs remain at risk. As of the morning of 15 March 2018, however, Toys “R” Us have crashed out of the race for a saviour investor as it announced it is ceasing its operations and leaving around 3,000 UK employees in a precarious position.

With this in mind, now is an opportunity to remind ourselves of key employment law provisions in place to assist both buyers and sellers of companies engaged in insolvency processes. Particularly, we focus on the position on varying employee contracts in normal business versus insolvency contexts.

Transfer of Undertakings (Protection of Employment) Regulations 2006 – (“TUPE”)

The basic effect of TUPE is well known. Where an organised grouping of economic resources is transferred from one entity to another, employees will benefit from protections against (i) dismissal by reason of the transfer and (ii) their terms of employment being altered in a way that is detrimental to them. All of the transferring businesses liabilities in relation to those employees will also transfer.

In any business merger and/or acquisition it may be commercially attractive to offer or request changes to transferring employee contracts. Recently, for example, we have seen attempts to impose new or more onerous post-termination restrictive covenants and reduce employees’ pay. Although TUPE does permit variations to contracts in some circumstances, proposed variations often fall outside of these exceptions.

Even where an employee is happy to accept a variation to their terms of employment, or where in return for some more detrimental terms of employment the employee receives other benefits with the effect that overall their terms of employment are no less onerous (or even more favourable) than their original contract, businesses must be cautious. Case law is clear that courts and tribunals will not engage in the exercise of balancing an employee’s terms of employment to determine whether overall a package is more or less favourable than pre-transfer. It has been ruled that an employee cannot waive their right to the provision of no less favourable terms if these are connected to a business transfer. This protection is contained in the Transfers of Undertakings Directive 2001/23/EC which is more commonly known as the Acquired Rights Directive (the “Acquired Rights Directive”), which the TUPE Regulations implement.

TUPE in Insolvencies

Where a business is (i) subject to a relevant insolvency process, (ii) being overseen by an insolvency practitioner and (iii) is not looking to liquidate the business assets (meaning the business is looking to trade out of insolvency) Regulation 9 will sometimes substitute the above rules on the variation of the employment terms of transferring employees.

In normal circumstances, for a variation that is because of the transfer or for a reason connected with the transfer to be permitted a business must show that there is an economic, technical or organisational reason entailing changes to the workforce (an “ETO reason”). If Regulation 9 applies, however, subject to certain other conditions being met a business will not be required to show that they had an ETO reason. They only need to show that the proposed variations are “designed to safeguard employment opportunities” by ensuring the transferring business or part of the business survives.

The normal position on the transfer of liabilities from the current to the new employer is also altered. Under Regulation 8, a transfer in the context of a relevant insolvency proceeding will see the liabilities in respect of the transferring employees pass to the Secretary of State rather than to the new employer. These liabilities will be paid by the National Insurance Fund (the “NIF”). However, the amount covered by the NIF is limited to statutory maximums. These are updated in line with RPI at the start of each new financial year and vary depending on the liability in question.

We are told that in the region of 2,500 and 5,500 jobs at Maplin and Toys “R” US UK respectively are at risk in connection with both of their insolvencies. Regulation 8 and 9 are designed to encourage rescue buyers with the ultimate aim of protecting the employees whose positions are in jeopardy.

What about Brexit?

We mentioned above that TUPE was introduced in order to implement the Acquired Rights Directive, which is EU law. Following the referendum in June 2016, it had been suggested that “the UK would no longer be bound by [TUPE]”.  Having had the benefit of reading the European Union (Withdrawal) Bill 2017-2019, we know that existing EU law will be transposed into UK law with immediate effect as of 29 March 2019. It follows that unless specific provision in relation to TUPE is made (which is unlikely) TUPE will continue to apply.

Separately, businesses are craving more certainty regarding Brexit. Not least in relation to the terms of any transition period and the inclusion of financial services firms in any transition arrangement. If this is not delivered soon, and possibly in any event, businesses may begin restructuring in ways that would trigger TUPE’s provisions.

If Brexit does translate into increased costs and/or pressures for businesses, we may expect the lesser known Regulation 9 to become more common parlance.  We still do not know the terms of the UK’s future relationship with the EU but it is possible that there may be net increases to business costs caused by added trade costs, tariffs, premiums and inflation to name but a few areas of concern. Combine this generally with President Trump’s “trade war”, rising business rates and the other increased costs to employers we have commented on previously[1], then one can see that there is an increased insolvency risk.

In light of this, the value of seeking advice on or revisiting the lesser known areas of TUPE contained in Regulation 8 and 9 is increasing.

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

[1] http://rosenblatt-law.co.uk/bulletins/incoming-costs-employers-6-april-2018-beyond/

When Termination becomes terminal

12/03/2018 | Lucy Hamilton-James
A recent judgment has brought into sharp focus the importance of giving careful consideration to the reason given for terminating a contract at the time of such termination.  The case, Phones 4U Lim

A recent judgment has brought into sharp focus the importance of giving careful consideration to the reason given for terminating a contract at the time of such termination.  The case, Phones 4U Limited (in administration) v EE Limited [2018] EWHC 49 (Comm), involved Phones 4U which had a trading agreement with EE Limited and, on 15 September 2014, appointed administrators.  On 17 September 2014, EE terminated the agreement citing its right under clause 14.1.2 to terminate the agreement if Phones 4U went into administration.

The administrators subsequently brought a claim against EE for unpaid commission and EE then sought to counterclaim for damages it claimed it had suffered as a result of a repudiatory breach of contract by Phones 4U for its failure to market EE products in accordance with the agreement.

The Judge ruled in favour of Phones 4U on the counterclaim the basis that EE could not recover for “loss of bargain” damages for repudiatory breach, despite the Judge finding that EE had a reasonable prospect of establishing a repudiatory breach.   The Judge decided that even if there had been a repudiatory breach at the time EE terminated the agreement, because the termination letter expressly citied its right to terminate for a contractual reason (the appointment of administrators by Phones 4U), EE could not later claim the agreement was terminated for a breach.

It can be tempting for a party wishing to end its agreement with another to use a clause which gives it the right to terminate without having to show breach, such as termination on the appointment of an administrator.  It can be a clean, no blame and express right to terminate, but if it is the sole, expressly used reason for termination, it can restrict the right to bring other claims in the future and should therefore be used with care.

If you need advice on terminating an agreement for reasons of insolvency without inadvertently waiving your future rights to bring a claim for damages, contact Anthony Field or Lucy Hamilton-James in the Dispute Resolution department.

Incoming costs for employers – 6 April 2018 and beyond

26/02/2018 | Noel Deans & Sean Field-Walton
The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below

The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below.

Payments In Lieu of Notice (a “PILON”)

Whether a PILON is subject to tax and NIC currently depends on the terms of an employee’s contract. If there is a contractual right to make a PILON, any such payment is usually treated as taxable earnings and subject to income tax and NIC. Contrastingly, non-contractual PILONs benefit from a £30,000 tax exemption derived from the current section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

From 6 April 2018 this position is changing. Through the insertion of new sections 402A – 402D to ITEPA employers will now be required to calculate the employee’s total basic pay including in respect of notice (whether or not served), and deduct from that sum income tax and both class 1 and 2 NIC. This means that both contractual and non-contractual PILONs will be subject to the usual tax and NIC deductions. HMRC have however confirmed that this change will not be retrospective.

Tax exemption for payments in respect of injured feelings?

Remaining unchanged despite the Government’s updates to the termination payments regime, is section 406B of ITEPA’s general exemption from tax for payments in respect of “injury to, or disability of, an employee”.

Nonetheless, through the insertion of new section 404B(7) to ITEPA payments by employers in respect of mere injury to feelings will not benefit from this tax exemption from 6 April 2018. Although employers will see this as another source of increased expense this change incorporates what has been the case law position since K Moorthy v HMRC [2016] which ended this debate and held that a payment in respect of injured feelings was taxable.

Mounting auto-enrolment obligations

From 6 April 2018, the mandatory contributions to be made by both employee and employer in respect of the auto-enrolment scheme will begin to increase.

The minimum employee contribution will rise from 1% to 3% and the corresponding minimum employer contribution will rise to 2%. These figures will further increase to 5% and 3% respectively from 6 April 2019.

Much commentary has focused on the potential increased cost to employers of complying with their auto-enrolment obligations. We agree that employers are likely to see balance sheets dented more by pension liabilities than at present, but this impact may be softer than anticipated. This is owing to current inflationary pressures which we expect to lead to an increasing number of employees choosing to opt out.

Foreign Service Relief (“FSR”)

6 April 2018 also sees an end to the application of FSR in relation to termination payments made to employees who had worked overseas but received a termination payment during a tax year when they were resident in the UK.  This is despite some trepidation displayed from influential lobbies, including but not limited to the Chartered Institute of Taxation.[1]

As currently drafted, even where an employee (except if exempted) has served the majority of their employment abroad but receive a termination payment during a tax year when they are resident in the UK no FSR would apply and the total sum would be treated as taxable earnings and subject to tax and NIC. Here we see the potential for significant and unexpected liabilities to occur. As a result, it is possible that employers may be expected to increase or “gross up” termination payments to employees now tax resident in the UK but who have previously worked overseas.

Concluding Thoughts

Employers considering dismissals may wish to expedite these processes especially if they want to offer a tax free inducement as a settlement term.

Potential increased tax liabilities for employers may ultimately be minimal. Yet, given the financial and reputational cost of a dispute with HMRC for contravention of these provisions would probably be significantly more costly, employers should actively take steps to prepare for implementation. This should include making sure that the internal payroll and HR functions are fully abreast and trained in respect of these changes.

The proposed changes to FSR in 2019 are an area we will be proactively monitoring. If the Government does not amend the draft legislation as it relates to FSR, employers, particularly those with an international base will need to plan their human resources and dismissal considerations more carefully to avoid unexpected liabilities falling due.

[1] Termination payments: removal of Foreign Service Relief (FSR) for UK Residents Response by the Chartered Institute of Taxation, 25 October 2017

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Update on Taylor Review and Employee Status in 2018

12/02/2018 | Noel Deans & Sean Field-Walton
In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicati

In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicative of the lack of clarity in the area. As it stands, determining employee status turns on questions of mutuality of obligation, personal service and control. All of these, unsurprisingly, have their own epilogue of related case law attempting to reach an understanding of what exactly each of those phrases means for businesses and employees.

Significant decisions in the area have seen what may on the face of it be divergent outcomes. Uber drivers have been held to be “workers” under the Employment Rights Act 1996 (the “ERA”), Deliveroo drivers were considered not to be “workers” for the purposes of a Union’s application for compulsory recognition under Schedule A1 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the “TULRC”) and plumbers have been held to be “workers” for the purposes of the ERA and the Working Time Regulations 1998 as well as an employee within the extended meaning of that term in the Equality Act 2010. Other decisions such as King v Sash Window Workshop Ltd and another have extended, or arguably just confirmed how existing rights apply. In this case, Mr King’s contract described itself as a “self-employed commission-only contract”. Under that contract, Mr King was paid on a commission-only basis. The Court of Justice of the European Union held that Mr King, despite having been described as self-employed and led to believe he could not take paid leave was actually a “worker” and was therefore entitled to carry over or be paid for the entire sum of that unpaid holiday. This clarified that the right to carry over is not only limited to cases involving sickness or maternity leave. Taken together with the decisions conferring “worker” status on new sections of workers, potentially large retrospective liabilities could be created and businesses may be concerned to understand what are their actual and/or likely exposures are.

As such, it is with perhaps renewed force that we can reflect on the Taylor Review of Modern Working Practices (the “Taylor Review”) published in 2017 and one of its central recommendations which was to codify the case law principles governing “employee” status into primary legislation.

On 7 February 2018 the Government published their response to the Taylor Review which acknowledged the lack of clarity and certainty over employment status (the “Response”). Therefore, this is an area we will closely monitor as 2018 develops.

One thing is for certain; the prevailing wind is in favour of extending or granting new rights to workers who previously would have been considered “casual”. Albeit they may seem minor adjustments, simple proposals accepted by the Response that would among other things oblige employers to provide written particulars and payslips to workers, are new compliance burdens should not be underestimated. Seeing as the general thrust for recognition of workers’ rights seems only to be increasing this may be an area where companies, especially those offering shares on public markets, should be particularly attuned to the risk of reputational damage and consider seeking specialist legal advice in this regard.

Employers may be relieved, however, that in the Response the Government has confirmed it will not (at least for now) be reversing the burden of proof where employment status is in dispute. It will remain the employee’s duty to prove their alleged status. Similarly, the Government has confirmed that despite some rumbles in the area of non-compete restrictions it does not propose to take any action in this area seeing as such restrictions were considered valuable by most respondents to consultations.

Seeing as the advent of both the GDPR and implementation of the extended Senior Managers & Certification Regime are not far off the horizon and given the ripeness and appetite for change in the area of employment status businesses may be prudent to seek specialist legal advice in these areas.

Our employment department has experience and expertise in all of the above areas.

If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

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