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Brexit and the British Legal Sector: Uncertainties, Solutions and Jewels in Crowns

12/06/2017 | Tom Spiller
The use of the legal sector by domestic and international parties is a huge contributor to the British economy in terms of: Jobs - with over 300,000 people directly employed; GDP - generating

The use of the legal sector by domestic and international parties is a huge contributor to the British economy in terms of:

  • Jobs – with over 300,000 people directly employed;
  • GDP – generating roughly 1.6% at around £30.6 billion per year; and
  • International trade – with an annual surplus of approximately £3 billion.

(more…)

Can’t pay or won’t pay – Court confirms insolvency proceedings are not appropriate for enforcing debts due under construction contracts

05/06/2017 | Elizabeth Weeks & Joshua Heavyside
Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has prov

Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge

Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has provided further clarification on the appropriate avenue for parties to contest debts arising from construction contracts. In his Judgment in the recent decision, Breyer Group plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch) (19 May 2017), Alexander QC stated that it would constitute “an abuse of process” for a party to pursue a winding up petition against a debtor in circumstances where it is “not a case of can’t pay, but won’t pay.” The proper place to settle such a dispute is either through adjudication or Court proceedings.

Origins of the dispute

Breyer Group plc (“Breyer”) was a contractor on a building project and had appointed RBK Engineering Ltd (“RBK”) in May 2015 as a sub-contractor to carry out certain refurbishment and electrical works. The appointment was formalised at the time by a contract between the parties containing standard terms and conditions, including terms relating to payment (including interim payment) and an express dispute resolution clause.

The work performed by RBK continued beyond the term of the contract, late into 2016. However, although a subsequent draft contract was never signed by either Breyer or RBK, it was clear both parties considered the relationship to be governed by the terms of the original contract.

By the end of 2016, a dispute had arisen between the parties with Breyer contesting the contents of RBK’s payment applications and alleging that RBK had carried out defective works, which Breyer would have to remedy at its own cost. In December 2016 the parties entered into a settlement agreement, which included provisions setting out a number of payments to be made by Breyer to RBK. Ultimately however, on 1 March 2017, when the final payment was due, Breyer served a Pay Less Notice on RBK, which in fact required RBK to settle a small balance to Breyer arising from the defects which had been disputed between the parties.

The winding up petition

The parties failed to reach agreement and on 22 March 2017 RBK filed a winding up petition against Breyer, claiming the contractor was indebted to it in the sum of £258,729.16. However, following the application of Breyer and an assessment of its finances, the Deputy Judge elected to strike out the winding up petition.

Alexander QC’s Judgment

In his Judgment, Alexander QC concluded that Breyer was “plainly not insolvent in the sense of being unable to pay the alleged debt.” Rather, a “genuine dispute” had arisen between the parties, to which Beyer had arguable defences and substantial cross-claims of its own.  Breyer’s position was predicated on its concerns regarding the quality of RBK’s electrical works, together with a dispute about which contract terms were operative. To therefore continue insolvency proceedings in such circumstances would be “oppressive” and an inappropriate forum for settling the dispute. Instead, Alexander QC held, the dispute could be readily resolved either through adjudication or Court proceedings.

In conclusion, where a dispute is purely about money and late payment, issuing a statutory demand for payment can be a cost effective and straightforward way to seek to extract timely settlement. However, should a dispute resulting in unpaid monies actually concern “won’t pay” issues, as was the case in Breyer, then the Court has made clear that the proper forum to seek resolution is adjudication or litigation. It appears as though the Court has one eye on seeking to dissuade parties from using the commercial threat of a winding up petition in circumstances where there are more substantive issues to be ventilated.

Adjudication

Adjudication is a prescribed “fast track” procedure designed to settle disputes arising from a construction contract. Adjudication is available to all parties to a construction contract, unless one of the contracting parties is a residential occupier or another exclusion is applicable. Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”), with the Scheme for Construction Contracts Regulations 1998 (the “Scheme”) providing the procedural fall back in the event that the construction contract in question does not contain all of the adjudication provisions of the Construction Act.

Pursuant to the Construction Act, any party to a construction contract has the right to refer a dispute to adjudication. Typically, adjudication will last only 28 days, although it is possible for the parties to extend this period by agreement.

Under the Scheme, the parties appoint an adjudicator to consider the issues in dispute, with the decision treated as interim-binding (unless the construction contract provides otherwise), meaning an adjudication decision is binding until finally determined by legal proceedings, arbitration or agreement. A successful party will most commonly seek to enforce an adjudicator’s decision in the Technology and Construction Court.

Rosenblatt offers expertise on all forms of construction disputes, including adjudication and arbitration, as well as court proceedings in complex and multijurisdictional litigation, supported by its Dispute Resolution team. The firm has extensive experience in the Technology and Construction Court. Rosenblatt’s Construction and Projects team also provides expert advice on non-contentious construction matters, working closely with its Real Estate department. For more information, please contact Rosenblatt’s Construction and Projects team.

The content of this bulletin should not be construed as legal advice. If you do require legal advice, please contact a solicitor at Rosenblatt.

Liquidated damages: how much is too much?

30/05/2017 | Matthew Littlestone
When two parties enter into a commercial contract, they do so with the best intentions.  After all, neither party wants to spend time, energy and money involved in a dispute over the performance of

When two parties enter into a commercial contract, they do so with the best intentions.  After all, neither party wants to spend time, energy and money involved in a dispute over the performance of the contract.

However, back in the real world, parties will continue to enter into agreements and subsequently fail to comply with their contractual obligations.  In most cases, a breach of the contract will require the offending party to pay the innocent party damages for such breach.  But how much will the innocent party be entitled to in damages?

Generally speaking, the guilty party will pay damages as required under common law.  However, in order to avoid the difficulties that can arise in calculating how much this will be, and to provide a level of certainty, parties will often make provision in the contract for the level of damages to be awarded to the innocent party by including a liquidated damages clause.  A liquidated damages clause also has the advantage, for the guilty party, of limiting its liability where the stipulated sum is less than the actual loss.

So if a contract includes a liquidated damages clause, that is the end of the problem right? Well, not quite.

One of the defences to a claim for liquidated damages is that the clause is unenforceable on the basis that it is a penalty.  If a clause is considered by the Court to be a penalty, then it will not be enforced beyond the actual loss incurred by the innocent party.  But under what circumstances is a liquidated damages clause deemed a penalty?

For over a century, the leading case on this particular question was Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 in which a liquidated damages clause was deemed to be a penalty if it is extravagant or unconscionable, with the predominant aim of deterring a party from breaching the contract, instead of compensating the innocent party by way of a genuine pre-estimate of loss.  In Dunlop, Lord Dunedin referred to the following four tests to help determine whether a clause is extravagant or unconscionable:

  • A clause may be penal if it is extravagant by comparison to the maximum possible loss arising from the breach.
  • A clause may be penal if the breach of contractconsists only of not paying a sum of money, and the amount stipulated as damages is greater than the sum that ought to have been paid (if assessed at common law).
  • A clause may be penal when a single lump sum is made payable by way of compensation, on the occurrence of one or more events, some of which may cause serious and others “trifling” damage.
  • A clause is not a penalty merely because a precise pre-estimation of loss is impossible.

It remains the case that determining whether a liquidated damages clause is a penalty or not will depend on many factors, including the wording of the clause itself and the circumstances at the time of making the contract (rather than the time of the breach).  The tests set out in Dunlop also remain relevant when considering straightforward liquidated damages clauses.

However, the Supreme Court, in Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 stated that the real question is whether the clause is penal and not whether it is a genuine pre-estimate of loss.  It held that in considering whether a provision in a contract is a penalty:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.  The innocent party can have no proper interest in simply punishing the defaulter.  His interest is in performance or some appropriate alternative to performance.”

As such, while the fact that the clause is not a genuine pre-estimate of loss may be relevant, it is necessary to consider other factors such as whether the innocent party has a commercial interest in the performance by the other party of its obligations under the contract.  Similarly, even if the clause seeks to protect a legitimate interest of the innocent party, it may still be a penalty if it is extravagant or unconscionable.

So what can be deemed to be a legitimate interest of a party?

At its simplest, it may be the case that a party’s legitimate interest is to receive compensation for breach of a contract.  However, there are more complex scenarios where compensation may not be the only legitimate interest.  Whether a clause is justified will depend upon the facts of the case.

For instance, in Cavendish, the relevant clause in question was in a share purchase agreement which provided that, if the sellers carried out certain activities which competed with the interests of the relevant company, the buyers could withhold any outstanding deferred consideration payments and exercise a call option over the sellers’ remaining shares.  The Supreme Court held that the buyers had a legitimate interest in the observance of the covenants which aimed to protect the goodwill of the business and the loyalty of the sellers was essential to preserve that goodwill.

In ParkingEye, the relevant clause imposed a charge for overstaying the free period of parking in a car park.  The Supreme Court held that although the claimant had not suffered any direct financial loss from the defendant overstaying the period of free parking, it had a commercial interest in the observance of the terms of its contract with the defendant which extended beyond the recovery of any loss (i.e. the management of the efficient use of parking space and the generation of income to run the scheme).

In light of these cases, when drafting a liquidated damages clause, it is worth bearing in mind that not only should you ensure that the figure in the clause can be justified as a genuine pre-estimate of loss but also that it is commercially justified.

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

Predictive Coding – “TAR” very much

04/01/2017 | Louisa Hartley
Since the decision in Pyrrho Investments Limited and another v MWB Property Limited and others EWHC 256 (Ch) permitting the use of predictive coding in an electronic disclosure exercise there has be

Since the decision in Pyrrho Investments Limited and another v MWB Property Limited and others [2016] EWHC 256 (Ch) permitting the use of predictive coding in an electronic disclosure exercise there has been much commentary on predictive coding, also referred to as Technology Assisted Review [“TAR”], and its use in the disclosure process. Prior to that decision, use of predictive coding technology in the English courts had been limited, mainly due to the fact that there was no authority confirming that its use fulfilled a disclosing party’s obligations under the Civil Procedure Rules [“CPR”].

Disclosure under the CPR

The purpose of disclosure is to make available evidence which either supports or weakens the parties’ respective cases in order to assist the Court to fulfill the overriding objective of dealing with cases justly and at a proportionate cost. Parties are required to undertake a “reasonable search” for documents (CPR r31.7) which meet the test of standard disclosure. This includes electronic documents such as emails and computer files.

What is reasonable is decided by reference to a number of factors (set out in CPR r31.7(2)), specifically:

(a) the number of documents to be searched;

(b) the nature and complexity of the proceedings;

(c) the ease and expense of retrieval of any particular document; and

(d) the significance of any document which is likely to be located during the search.

There are additional factors that determine what is a reasonable search of electronic documents such as consideration as to the availability and location of electronic documents and the cost and likelihood of recovering them (Practice Direction 31B).

What is predictive coding?

Predictive coding is used in the electronic disclosure process in litigation. It is computer software which identifies electronic documents that meet the test of standard disclosure. It aims to streamline the document search and review process and, in doing so, to reduce the costs and the time which would otherwise be spent manually reviewing documents.

Predictive coding is a distinct form of TAR in that it is a continuous learning mechanism, as opposed to merely using technology to search for keywords in documents to consider whether certain document should be disclosed or not. The increasing use of TAR and now predictive coding in place of human manual review of documents in the disclosure exercise is due to the fact that it is just as, if not more, accurate than manual review and in the majority of cases costs less time and money.

How it works

Predictive coding combines human expertise with data analysis to create an algorithm by which relevant and non-relevant documents are identified, categorised and flagged.

In practice, the parties will first agree a set of guidelines to define the data size, criteria for inclusion of documents and a margin of error. Documents are then uploaded onto an electronic review platform and a representative sample is selected to train the software. A manual review of the documents produced by the software is carried out by a solicitor who categorises them as relevant or not-relevant. Predictive coding software then analyses the sample and scores the relevancy of documents to the case based on common concepts and the language included. The remaining documents are then reviewed by the software and categorised as either relevant or not relevant.

Advantages

  • Avoids manual review of a large number of irrelevant documents therefore saving time and costs.
  • The number of documents in review is not directly proportionate to the costs i.e. doubling the number of documents does not double the cost of reviewing them.
  • Documents which are relevant in the case can be identified quicker than if each were reviewed manually.

Disadvantages

  • Predictive coding does not work with non-text-searchable documents and mainly numerical content.
  • Where there is a high proportion of relevant documents the time and cost savings will not be as significant.
  • It is not always 100% accurate.

The decision in Pyrrho

Master Matthews highlighted in his judgment that whilst the CPR and its Practice Directions contemplate the search for electronic documents, neither deal with the question as to how these should be searched. The Master did note however that PD31B does mention the use of “automated methods” or “automated search techniques” in the search for electronic documents.

The number of electronic documents under review in Pyrrho amounted to over 17 million. After de-duplication that number was still 3.1 million. Drawing on the decisions of the US Federal Court case of Moore v Publicis Groupe, 11 Civ 1279 in which there were over 3 million documents to be reviewed and the Irish High Court case of Irish Bank Resolution Corporation Ltd v Quinn [2015] IEHC 175 in which there were over half a million documents after de-duplication, Master Matthews considered that the use of predictive coding was appropriate. Included in the factors he listed in his Judgment as being in favour of the use of TAR were:-

  1. The parties had agreed on the use of predictive coding software, subject to the Court’s approval.
  2. There is no evidence that predictive coding is less accurate than manual review and, in fact, there was evidence that it was more accurate in some cases.
  3. There is nothing in the CPR or its Practice Directions prohibiting its use.
  4. The number of electronic documents to be reviewed in the case was “huge” and the cost of manually searching for these would be “enormous”. The highest cost estimate given to use the technology was £469,049 plus monthly hosting costs of £20,820 which Master Matthews considered as “far less expensive than the full manual alternative”.
  5. The value of the claim was tens of millions of pounds and therefore the costs of using the software were proportionate

Although each case will turn on its own facts, the implication of the judgment in Pyrrho is that there is now judicial authority for parties to use predictive coding in e-disclosure where it is considered appropriate. The more recent case of Brown v BCA Trading Ltd [2016] EWHC 1464 (Ch) affirms the Court’s view that technology is sometimes a better alternative to traditional methods. In that case, the Court ordered the use of predictive coding against the Claimant’s wishes. Over £20,000,000 was being claimed with the cost of predictive coding estimated to be around £132,000 and the cost of traditional review £250,000.

The Court considered the factors identified by Master Matthews in Pyrrho and made an order for the use of TAR. Consequently, even where the parties do not agree to predictive coding, the Court may order its use in disclosure where the arguments in favour far outweigh those against it. It may well transpire that TAR will become the norm, unless there is a compelling reason not to use it.

If you would like any further information, please contact Simon Walton on 0207 955 1455.

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

New Apprenticeship Levy

14/12/2016 | Andrea London
As announced in the Summer 2015 budget, those companies with an annual UK pay bill of over £3m will be obliged to pay the government's new apprenticeship levy. The levy is a key element of the gover

As announced in the Summer 2015 budget, those companies with an annual UK pay bill of over £3m will be obliged to pay the government’s new apprenticeship levy. The levy is a key element of the government’s plan to fund three million new Apprenticeships in England by 2020.

The levy is due to come into force from 6 April 2017 and it will be mandatory and require employers to invest in apprenticeships. The size of such investment will be calculated in relation to the size of the company’s UK payroll bill.

How will levy contributions be calculated?

The levy will be required to be paid by all employers with a gross annual pay bill of more than £3m. A company’s levy contribution will be paid against the total gross bill at a rate of 0.5 per cent, minus an annual levy allowance of £15,000 to offset against this. In addition to the amount payable by the employer, the Government will apply a 10 per cent ‘top up’. Therefore, for every £1 paid in to the fund, the employer will have £1.10 to spend.

Levy payment will be collected by HMRC through the PAYE system. Employers will have to calculate, report and pay the levy to HMRC through the PAYE process, alongside any tax and NICs. Each month, the employer will have to inform HMRC whether it needs to pay the apprenticeship levy and if so, include it within the usual PAYE payment.

Example:

A company with an annual pay bill of £10m and will be obliged to contribute an annual levy payment of £35,000. This contribution is calculated as follows:

  • Annual gross pay bill of £10,000,000
  • Apprenticeship levy calculated at 0.5% of £10,000,000 = £50,000
  • Less the £15,000 apprenticeship levy allowance = £35,000 annual payment

What will happen to the money once the levy has been paid?

Once an employer in England has registered and paid the levy, it will then be able to access apprenticeship funding through a digital apprenticeship service account. The account will allow employers to effectively “reclaim” their levy contributions as digital vouchers, which can then be used to select and pay for Government approved training providers, post apprenticeship vacancies and to search for candidates. Companies will have up to 24 months to spend the vouchers, after which any unspent funds in the digital account will expire.

As apprenticeships are a devolved responsibility, Scotland, Wales and Northern Ireland have their own, separate arrangements in place.

What can the levy fund be spent on? 

The levy contributions can only be used for Government approved apprenticeships, which includes both the new approved standards and Trailblazer Apprenticeships. The levy fund must be spent on training and assessment with a recognised and registered apprenticeship training provider, those training providers with an inadequate Ofsted rating will not feature on the approved register.

Unless an organisation becomes its own training provider and draws down the funds, employers will also be unable to use the levy for internal training. In order to become a training provider, the company would be subject to the appropriate inspections and would need to officially register as a training organisation.

Digital funds and government funding cannot  be used for:

  • apprentice wages or expenses;
  • trainee or workplace programmes;
  • the costs of setting up an Apprentice programme.

Opportunities for smaller companies

Employers with a pay bill of less than £3m will not have to pay the levy, but will be able to benefit from the fund. When the new funding system begins, non-levy payers will be able to choose an approved training and assessment provider. In a scheme known as ‘co-investment’, the company will only be expected to contribute 10% of the cost of training, with the government paying the remaining 90%. For now, SMEs will pay the training provider directly and will not need to use the digital apprenticeship service account until at least 2018.

What next?

Given the mandatory nature of the levy, employers with a £3m+pay bill will need to ensure that their business is in a position to benefit from its own contributions. Rather than be disadvantaged by levy payments, companies should begin to consider either introducing apprenticeships or developing current programmes in order to recover the monies they have been required to pay in.

If you would like any further information, please contact the Employment Department on 0207 955 0880.

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

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