Thursday, 24 November 2011
Tuesday, 22 November 2011
Friday, 24 June 2011
Rolling out the red carpet for the wealthy - new UK Visa regulations
John Walmsley has recently written an article on the important changes to the visa regulations and it is published on the BSR Russia website.
http://www.bsr-russia.com/en/uk-visas/item/1752-rolling-out-the-red-carpet-for-the-wealthy-–-new-uk-visa-regulations.html
http://www.bsr-russia.com/en/uk-visas/item/1752-rolling-out-the-red-carpet-for-the-wealthy-–-new-uk-visa-regulations.html
Monday, 28 March 2011
JKW LAW - Interview with John Walmsley
John Walmsley was interviewed recently about JKW Law at the new office near London Bridge.
http://www.theleathermarket.co.uk/community/businessprofiles/157/jkw-law
http://www.theleathermarket.co.uk/community/businessprofiles/157/jkw-law
Tuesday, 22 March 2011
Performance Bonds - A Case in Point
Performance bonds are commonly used in construction contracts to provide the employer with additional protection in the event of the contractor failing to complete the contract.
Definition
A performance bond is an undertaking by a surety (usually a bank) to make payment to the employer if the contractor defaults on his contractual obligations. Upon the contractor’s failure to perform in full, the employer is entitled to call on the surety to make good the loss, up to the maximum amount of the bond.
Performance bonds can be either “conditional” or “on demand”.
A conditional bond guarantees payment of loss once the loss or breach of contract has been established.
An on demand bond entitles the employer to call for payment by the surety upon giving a particular form of notice. The notice only needs to assert that the contractor has defaulted on his obligations. The bond money will then be paid regardless of any disputes that may exist. Quite simply, the bond is paid on demand “without proof or condition”.
Clearly, an on demand bond presents risks for contractors, especially if they are in dispute with their employer. There have been a number of cases where the parties have been in dispute and the contractor has sought an injunction against the surety bank to prevent them paying out the bond. On numerous occasions such injunction applications have been denied by the Courts. It appears that in certain circumstances “on demand” really does mean “on demand”.
Substance Not Label
These bonds are clearly very important contractual provisions and they require expert drafting. This is because, in the event of litigation, the Courts look at the substance (rather than the label) of these clauses. In other words, the Courts examine the “true construction” of the clause. For example, using the words “on demand” within the bond/guarantee clause does not necessarily mean that it is an “on demand” bond.
A recent High Court case which highlights the importance of carefully drafting performance bonds is Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch). Vossloh Aktiengesellschaft (“VAG”) was the parent company to a number of subsidiaries. One of the subsidiaries was Vossloh Locomotives (“VL”), a locomotive manufacturer. Alpha Trains (“Alpha”) purchased a number of locomotives from VL. In 2009 VAG agreed to provide a parent company guarantee/bond to Alpha (“the 2009 Guarantee”) whereby VAG guaranteed the performance of VL’s obligations and guaranteed to indemnify Alpha for any losses resulting from a default by VL.
In 2010 Alpha notified VAG that 63 locomotives bought from VL were defective and demanded that VAG pay them 17 million Euro under the 2009 Guarantee. The sum demanded by Alpha represented the anticipated costs to Alpha of repairing the defective trains and compensation payments to unsatisfied customers. VAG refused to pay the sum demanded, the dispute was litigated and eventually the High Court had to rule on VAG’s obligations under the 2009 Guarantee. Essentially, the question before the Court was under what circumstances could VAG be forced to pay the bond to Alpha - i.e. what kind of bond was it?
The key provisions from the 2009 Guarantee were:
2.1 The Guarantor hereby unconditionally and irrevocably as a continuing obligation and as principal debtor and not merely as surety...(c) undertakes with each Beneficiary that whenever a Guaranteed Party does not pay any of the Secured Obligations as and when the same shall be expressed to be due, the Guarantor shall forthwith on demand pay such Secured Obligations which have not been paid at the time such demand is made.
3.1 All sums payable hereunder shall be paid on demand to such bank account as may be specified in any demand made by a Beneficiary hereunder, in immediately available funds, free of any restriction or condition and free and clear of and without any deduction or withholding, whether for or on account of tax, by way of set-off or otherwise, except to the extent required by law.
6.4 Subject to the terms of this Guarantee, and in particular this Clause 6, the Guarantor shall be entitled to raise such defences which are available to the Guaranteed Party under the Relevant Document only after the Guarantor has complied with Clause 2.l of this Guarantee. However the Guarantor is not entitled to refuse payment or performance based on this right to reclaim.
Alpha’s case was that the 2009 Guarantee constituted an on demand bond, requiring payment to be made on demand and unconditionally.
VAG’s case was that the 2009 Guarantee was a conditional bond, which firstly required VL’s breach of contract to be proved by Alpha.
Decision
The key points to note from the Court’s ruling are:
• As the parties are in dispute, the Court examined the 2009 Guarantee to find its “true construction”.
• The area of law relevant to the dispute was the law of suretyship, which is an area of law “bedevilled by imprecise terminology and where...it is important not to confuse the label given by the parties to the surety’s obligation...with the substance of that obligation.”
• It is often difficult to determine whether, on its true construction, a clause which purports to provide for “on demand” payment is actually an on demand bond (where payment is triggered by a mere demand) or whether it is a guarantee (i.e. a conditional bond) where the obligation to pay is conditional on proof of default by the contractor.
• The Court sought guidance from the Court of Appeal case Marubeni Hong Kong v Government of Mongolia [2005] EWCA Civ 395. In this case it was said that performance bonds were specialised legal instruments which originated from the banking industry, and as such cases relating to performance bonds in a banking context may not provide useful guidance in a non-banking context. Consequently, in a non-banking context, there is a “very strong presumption” against the existence of an on demand bond and it would require clear words to the contrary to rebut the presumption.
• There is a spectrum of contractual obligations in this area of law, ranging from pure contracts of guarantee (where the surety’s liability is secondary) to on demand bonds, where liability is triggered by a mere demand and without proof of default.
Having examined the law and the true construction of the 2009 Guarantee given by VAG, the Court ruled that the presumption against the existence of an on demand bond had not been rebutted. The wording of the 2009 Guarantee was such that, on its true construction, the bond was premised upon the prior establishment of default by VL. As such, the 2009 Guarantee constituted a conditional bond. Furthermore, clause 6.4 of the 2009 Guarantee provided VAG with defences to paying the bond. Such defences would have been completely ineffective against an on demand bond. Therefore, the inclusion of these defences in the 2009 Guarantee further indicated that the bond was really a conditional one. As the 2009 Guarantee was ruled to be a conditional bond VAG could not be required to make payment until VL’s default was proved.
Comment
The Vossloh case clearly demonstrates the importance of expertly drafting performance bonds and the approach taken by the Court is both understandable and to be welcomed, as the consequences of on demand bonds are potentially serious, especially if the contractor is in dispute with his employer.
In the Construction Industry any bond calling itself a “Performance Guarantee Bond” needs careful analysis of its terms to ascertain whether it is in fact a Wolf in Sheep’s Clothing!
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Definition
A performance bond is an undertaking by a surety (usually a bank) to make payment to the employer if the contractor defaults on his contractual obligations. Upon the contractor’s failure to perform in full, the employer is entitled to call on the surety to make good the loss, up to the maximum amount of the bond.
Performance bonds can be either “conditional” or “on demand”.
A conditional bond guarantees payment of loss once the loss or breach of contract has been established.
An on demand bond entitles the employer to call for payment by the surety upon giving a particular form of notice. The notice only needs to assert that the contractor has defaulted on his obligations. The bond money will then be paid regardless of any disputes that may exist. Quite simply, the bond is paid on demand “without proof or condition”.
Clearly, an on demand bond presents risks for contractors, especially if they are in dispute with their employer. There have been a number of cases where the parties have been in dispute and the contractor has sought an injunction against the surety bank to prevent them paying out the bond. On numerous occasions such injunction applications have been denied by the Courts. It appears that in certain circumstances “on demand” really does mean “on demand”.
Substance Not Label
These bonds are clearly very important contractual provisions and they require expert drafting. This is because, in the event of litigation, the Courts look at the substance (rather than the label) of these clauses. In other words, the Courts examine the “true construction” of the clause. For example, using the words “on demand” within the bond/guarantee clause does not necessarily mean that it is an “on demand” bond.
A recent High Court case which highlights the importance of carefully drafting performance bonds is Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch). Vossloh Aktiengesellschaft (“VAG”) was the parent company to a number of subsidiaries. One of the subsidiaries was Vossloh Locomotives (“VL”), a locomotive manufacturer. Alpha Trains (“Alpha”) purchased a number of locomotives from VL. In 2009 VAG agreed to provide a parent company guarantee/bond to Alpha (“the 2009 Guarantee”) whereby VAG guaranteed the performance of VL’s obligations and guaranteed to indemnify Alpha for any losses resulting from a default by VL.
In 2010 Alpha notified VAG that 63 locomotives bought from VL were defective and demanded that VAG pay them 17 million Euro under the 2009 Guarantee. The sum demanded by Alpha represented the anticipated costs to Alpha of repairing the defective trains and compensation payments to unsatisfied customers. VAG refused to pay the sum demanded, the dispute was litigated and eventually the High Court had to rule on VAG’s obligations under the 2009 Guarantee. Essentially, the question before the Court was under what circumstances could VAG be forced to pay the bond to Alpha - i.e. what kind of bond was it?
The key provisions from the 2009 Guarantee were:
2.1 The Guarantor hereby unconditionally and irrevocably as a continuing obligation and as principal debtor and not merely as surety...(c) undertakes with each Beneficiary that whenever a Guaranteed Party does not pay any of the Secured Obligations as and when the same shall be expressed to be due, the Guarantor shall forthwith on demand pay such Secured Obligations which have not been paid at the time such demand is made.
3.1 All sums payable hereunder shall be paid on demand to such bank account as may be specified in any demand made by a Beneficiary hereunder, in immediately available funds, free of any restriction or condition and free and clear of and without any deduction or withholding, whether for or on account of tax, by way of set-off or otherwise, except to the extent required by law.
6.4 Subject to the terms of this Guarantee, and in particular this Clause 6, the Guarantor shall be entitled to raise such defences which are available to the Guaranteed Party under the Relevant Document only after the Guarantor has complied with Clause 2.l of this Guarantee. However the Guarantor is not entitled to refuse payment or performance based on this right to reclaim.
Alpha’s case was that the 2009 Guarantee constituted an on demand bond, requiring payment to be made on demand and unconditionally.
VAG’s case was that the 2009 Guarantee was a conditional bond, which firstly required VL’s breach of contract to be proved by Alpha.
Decision
The key points to note from the Court’s ruling are:
• As the parties are in dispute, the Court examined the 2009 Guarantee to find its “true construction”.
• The area of law relevant to the dispute was the law of suretyship, which is an area of law “bedevilled by imprecise terminology and where...it is important not to confuse the label given by the parties to the surety’s obligation...with the substance of that obligation.”
• It is often difficult to determine whether, on its true construction, a clause which purports to provide for “on demand” payment is actually an on demand bond (where payment is triggered by a mere demand) or whether it is a guarantee (i.e. a conditional bond) where the obligation to pay is conditional on proof of default by the contractor.
• The Court sought guidance from the Court of Appeal case Marubeni Hong Kong v Government of Mongolia [2005] EWCA Civ 395. In this case it was said that performance bonds were specialised legal instruments which originated from the banking industry, and as such cases relating to performance bonds in a banking context may not provide useful guidance in a non-banking context. Consequently, in a non-banking context, there is a “very strong presumption” against the existence of an on demand bond and it would require clear words to the contrary to rebut the presumption.
• There is a spectrum of contractual obligations in this area of law, ranging from pure contracts of guarantee (where the surety’s liability is secondary) to on demand bonds, where liability is triggered by a mere demand and without proof of default.
Having examined the law and the true construction of the 2009 Guarantee given by VAG, the Court ruled that the presumption against the existence of an on demand bond had not been rebutted. The wording of the 2009 Guarantee was such that, on its true construction, the bond was premised upon the prior establishment of default by VL. As such, the 2009 Guarantee constituted a conditional bond. Furthermore, clause 6.4 of the 2009 Guarantee provided VAG with defences to paying the bond. Such defences would have been completely ineffective against an on demand bond. Therefore, the inclusion of these defences in the 2009 Guarantee further indicated that the bond was really a conditional one. As the 2009 Guarantee was ruled to be a conditional bond VAG could not be required to make payment until VL’s default was proved.
Comment
The Vossloh case clearly demonstrates the importance of expertly drafting performance bonds and the approach taken by the Court is both understandable and to be welcomed, as the consequences of on demand bonds are potentially serious, especially if the contractor is in dispute with his employer.
In the Construction Industry any bond calling itself a “Performance Guarantee Bond” needs careful analysis of its terms to ascertain whether it is in fact a Wolf in Sheep’s Clothing!
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Payment Notices - All Change?
The law governing payments in the construction industry will change significantly when Part 8 of the Local Democracy Economic Development and Construction Act 2009 (“the 2009 Act”) comes into force later this year. This Act proposes some important amendments to the existing law and this article aims to explain one of these amendments and how it may impact your day-to-day business: namely, getting paid.
The Housing Grants Construction and Regeneration Act 1996 (“the 1996 Act”)
Below is a summary of how payments are dealt with under the existing law by virtue of the 1996 Act.
• Payment Notices (s.110(2)) – The payer gave notice of what they intended to pay the payee and the payer must have shown the basis on which the calculation was made. This provision of the 1996 Act was fairly easy to satisfy and did not require the issuer of the Payment Notice to provide much detail regarding the calculation of the sum.
• Withholding Notices (s.111) – The payer issued the payee with a notice stating the amount they intended to withhold from the amount due. The payer would have to state their grounds for withholding payment and would have to attribute the amount withheld to each ground. It was unlawful to withhold payment without first issuing a Withholding Notice.
• There was no statutory sanction for failure to issue Payment Notices. Consequently the legal requirement to issue a Payment Notices was often ignored.
As widely acknowledged, the aim of these provisions was to improve cash flow within the Construction Industry and to provide those lower down the payment chain with some degree of certainty as to how much they would be paid and when.
In 2004 the Government began its review of the 1996 Act. The conclusion of the review was that the 1996 legislation had failed to achieve its aims and needed to be amended. Consequently the 2009 Act was passed and makes the following amendments to the 1996 Act:
• Payment Notices – The payer or the payee can issue Payment Notices. The construction contract must specify which party is to issue these notices. Whoever issues the Payment Notice, it must be issued within five days after the payment due date.
• Payment Notices issued by the payer (s.110A(2)) – The payer must issue a notice to the payee specifying the sum that the payer considers to be due and the basis on which that sum is calculated.
• Payment Notices issued by the payee (s.110A(3)) – The payee must issue a notice to the payer specifying the sum that the payee considers to be due and the basis on which that sum is calculated.
• Failure of the payer to issue a Payment Notice (s.110B) – If the construction contract requires the payer to issue a Payment Notice but the payer fails to do so, the payee may issue a Payment Notice instead. This Payment Notice must specify the sum the payee considers to be due and the basis on which that sum is calculated.
• The sum specified in a Payment Notice can be zero. Even if a payer considers that nothing is due to the payee, the payer must issue a Payment Notice stating zero, so as to prevent the payee from issuing a Payment Notice for a different amount.
• Requirement to pay the notified sum (s.111) – the payer must pay the sum stated on the payer’s (or payee’s) Payment Notice before the final date for payment. If the payee has issued the Payment Notice this sum can be disputed by the payer. If it is disputed, the payer must issue the payee with a notice of its intention to pay the payee less than the notified sum (s.111(3)). This notice must specify the basis on which the new sum is calculated. This provision is the 2009 Act’s equivalent of the Withholding Notice provision from the 1996 Act. It is essential that the payer issues a s.111(3) notice if it disputes the payee’s Payment Notice, otherwise the payer is liable to pay the sum stated in the Payment Notice.
• Statutory sanctions for failure to issue Payment Notices – Unlike the position under the 1996 Act and as explained above, if the payer fails to issue a Payment Notice the payer leaves itself vulnerable to receiving a Payment Notice from the payee. The sum stated in the payee’s Payment Notice will then become the default sum due, unless this sum is challenged by the payer issuing a notice under s.111(3).
Key points to consider from the 2009 Act
The 2009 Act requires Payment Notices and (the equivalent of) Withholding Notices to specify the sum considered due and “the basis on which that sum is calculated”. This is a rather vague phrase and is almost certain to generate litigation in the future.
Under the 1996 Act it is sufficient to simply state that the sum specified in a Payment/Withholding Notice has been calculated using the valuation clause within the construction contract (the “adequate mechanism”). However, this seems to be overly simplistic reasoning, as it is obvious that the basis for such a calculation would be the contract’s valuation clause.
Consequently, it is submitted that following the reforms to be introduced by the 2009 Act, the “basis” on which the sum is calculated will become more important, such that it will be insufficient to simply state that the contract’s valuation clause has been complied with. Instead, it is believed that the notice will have to demonstrate that the valuation clause has been complied with. Essentially, this means that the issuer of the notice will have to “show their working”.
How the Courts will interpret the phrase “the basis on which that sum is calculated” remains to be seen, but it is possible that the Courts will adopt a stricter approach. Consequently, we advise that as protection from this uncertainty, payers/payees should support the sum specified in a notice with detailed and accurate evidence regarding its calculation(s).
It is especially important that employers and main contractors get this right and provide sufficient evidence to support their calculations, as failure to do so could invalidate their Payment Notice, thus allowing it to be supplanted by a Payment Notice from the payee.
Comment
The amendments to the 1996 Act to be introduced later this year by the 2009 Act will change the payments regime for the construction industry. This will inevitably involve costs to businesses as standard form contracts and payment practices will have to be changed and staff will have to receive new training.
It is too early to tell whether the reforms will achieve their aims of improving payment certainty and cash flow within the industry, although the fact that payers can no longer ignore the requirement to issue Payment Notices represents a step forward.
The law governing payments in the construction industry will change significantly when Part 8 of the Local Democracy Economic Development and Construction Act 2009 (“the 2009 Act”) comes into force later this year. This Act proposes some important amendments to the existing law and this article aims to explain one of these amendments and how it may impact your day-to-day business: namely, getting paid.
The Housing Grants Construction and Regeneration Act 1996 (“the 1996 Act”)
Below is a summary of how payments are dealt with under the existing law by virtue of the 1996 Act.
• Payment Notices (s.110(2)) – The payer gave notice of what they intended to pay the payee and the payer must have shown the basis on which the calculation was made. This provision of the 1996 Act was fairly easy to satisfy and did not require the issuer of the Payment Notice to provide much detail regarding the calculation of the sum.
• Withholding Notices (s.111) – The payer issued the payee with a notice stating the amount they intended to withhold from the amount due. The payer would have to state their grounds for withholding payment and would have to attribute the amount withheld to each ground. It was unlawful to withhold payment without first issuing a Withholding Notice.
• There was no statutory sanction for failure to issue Payment Notices. Consequently the legal requirement to issue a Payment Notices was often ignored.
As widely acknowledged, the aim of these provisions was to improve cash flow within the Construction Industry and to provide those lower down the payment chain with some degree of certainty as to how much they would be paid and when.
In 2004 the Government began its review of the 1996 Act. The conclusion of the review was that the 1996 legislation had failed to achieve its aims and needed to be amended. Consequently the 2009 Act was passed and makes the following amendments to the 1996 Act:
• Payment Notices – The payer or the payee can issue Payment Notices. The construction contract must specify which party is to issue these notices. Whoever issues the Payment Notice, it must be issued within five days after the payment due date.
• Payment Notices issued by the payer (s.110A(2)) – The payer must issue a notice to the payee specifying the sum that the payer considers to be due and the basis on which that sum is calculated.
• Payment Notices issued by the payee (s.110A(3)) – The payee must issue a notice to the payer specifying the sum that the payee considers to be due and the basis on which that sum is calculated.
• Failure of the payer to issue a Payment Notice (s.110B) – If the construction contract requires the payer to issue a Payment Notice but the payer fails to do so, the payee may issue a Payment Notice instead. This Payment Notice must specify the sum the payee considers to be due and the basis on which that sum is calculated.
• The sum specified in a Payment Notice can be zero. Even if a payer considers that nothing is due to the payee, the payer must issue a Payment Notice stating zero, so as to prevent the payee from issuing a Payment Notice for a different amount.
• Requirement to pay the notified sum (s.111) – the payer must pay the sum stated on the payer’s (or payee’s) Payment Notice before the final date for payment. If the payee has issued the Payment Notice this sum can be disputed by the payer. If it is disputed, the payer must issue the payee with a notice of its intention to pay the payee less than the notified sum (s.111(3)). This notice must specify the basis on which the new sum is calculated. This provision is the 2009 Act’s equivalent of the Withholding Notice provision from the 1996 Act. It is essential that the payer issues a s.111(3) notice if it disputes the payee’s Payment Notice, otherwise the payer is liable to pay the sum stated in the Payment Notice.
• Statutory sanctions for failure to issue Payment Notices – Unlike the position under the 1996 Act and as explained above, if the payer fails to issue a Payment Notice the payer leaves itself vulnerable to receiving a Payment Notice from the payee. The sum stated in the payee’s Payment Notice will then become the default sum due, unless this sum is challenged by the payer issuing a notice under s.111(3).
Key points to consider from the 2009 Act
The 2009 Act requires Payment Notices and (the equivalent of) Withholding Notices to specify the sum considered due and “the basis on which that sum is calculated”. This is a rather vague phrase and is almost certain to generate litigation in the future.
Under the 1996 Act it is sufficient to simply state that the sum specified in a Payment/Withholding Notice has been calculated using the valuation clause within the construction contract (the “adequate mechanism”). However, this seems to be overly simplistic reasoning, as it is obvious that the basis for such a calculation would be the contract’s valuation clause.
Consequently, it is submitted that following the reforms to be introduced by the 2009 Act, the “basis” on which the sum is calculated will become more important, such that it will be insufficient to simply state that the contract’s valuation clause has been complied with. Instead, it is believed that the notice will have to demonstrate that the valuation clause has been complied with. Essentially, this means that the issuer of the notice will have to “show their working”.
How the Courts will interpret the phrase “the basis on which that sum is calculated” remains to be seen, but it is possible that the Courts will adopt a stricter approach. Consequently, we advise that as protection from this uncertainty, payers/payees should support the sum specified in a notice with detailed and accurate evidence regarding its calculation(s).
It is especially important that employers and main contractors get this right and provide sufficient evidence to support their calculations, as failure to do so could invalidate their Payment Notice, thus allowing it to be supplanted by a Payment Notice from the payee.
Comment
The amendments to the 1996 Act to be introduced later this year by the 2009 Act will change the payments regime for the construction industry. This will inevitably involve costs to businesses as standard form contracts and payment practices will have to be changed and staff will have to receive new training.
It is too early to tell whether the reforms will achieve their aims of improving payment certainty and cash flow within the industry, although the fact that payers can no longer ignore the requirement to issue Payment Notices represents a step forward.
The law governing payments in the construction industry will change significantly when Part 8 of the Local Democracy Economic Development and Construction Act 2009 (“the 2009 Act”) comes into force later this year. This Act proposes some important amendments to the existing law and this article aims to explain one of these amendments and how it may impact your day-to-day business: namely, getting paid.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances. | 2/24 |
Thursday, 24 February 2011
Liquidated Damages Clauses - A Matter of Construction
The recent Azimut-Benetti decision last year is the latest in a long line of decisions in which the courts have addressed the important question of whether a liquidated damages clause (LDC) is enforceable or is in fact a penalty clause and not enforceable. The decision in Azimut - Benetti has ‘shifted the goalposts’ to a position where a party seeking to enforce an LDC can more confidently argue that it is a binding LDC provided certain conditions are satisfied.
What Are LDCs?
LDCs can be described as a contractual term which two parties have agreed upon which states that the injured party can recover (upon a specific breach by the offending party) a specified sum of money. Put in a construction context, this specific breach is late completion of a construction project. The sum articulated in the LDC is often expressed as an amount per day or per week.
Such clauses will not be considered enforceable by the courts if it is determined that its purpose is to punish rather than to compensate the injured party, i.e. it is a penalty.
The Current Law
Although not a construction case, the Azimut-Benetti v Healey decision will have an effect across the construction industry, given its impact and shift in approach towards how the courts will now analyse LDCs.
Briefly, the facts of this case concerned Azimut-Benetti (a luxury yacht builder in Italy) entering into a contract with a company owned by Mr Darrell Marcus Healey to construct a yacht for €38m. The relevant LDC provided:
“Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the builder will promptly return the balance of sums received from the Buyer together with the Buyer’s Supplies if not yet installed in the Yacht.”
When the Defendant’s company failed to pay the first agreed 10% instalment, the Claimant terminated the contract and proceeded to make a summary judgment action to claim 20% of the contract price under the LDC. Meanwhile, the Defendant argued the LDC was unenforceable as a penalty.
Decision
In deciding the case, Blair J departed from previous case law by moving towards a “commercial justification” test; namely that a LDC “may be commercially justifiable provided that its dominant purpose is not to deter the other party from breach”. Blair J held this was the case in this instance- the purpose of the clause was evidently to strike a balance between the interests of both parties should the Claimant lawfully terminate the contract (this was evidenced through the fact that the clause also made provision for the offending party to receive the balance of any sums already paid to the injured party as well as any supplies not yet used in the construction of the yacht).
Significantly, Mr Justice Blair set out:-
• Because the LDC had a clear commercial and compensatory justification for both parties, it was not a penalty and was therefore enforceable.
• Where both contracting parties are legally represented and have freely entered the contract, the court should (as much as possible) uphold the agreed contractual terms.
The Pre- Azimut-Benetti Interpretation Framework
In the Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] case, the LDC made the provision “Alfred McAlpine should pay liquidated and ascertained damages for delay at the rate at the rate of £45,000 per week or part thereof”. Sometime after the contract had been entered, it became clear that completion of the works would not take place until June 2005 (some two and a half years later than the anticipated completion date expressed in the contract - 14 August 2002).
This meant the LDC came into play- McAlpine was seriously concerned regarding its liability under the clause and proceeded to run the argument in court that the LDC was excessive and so amounted to an unenforceable penalty clause. Tilebox (as expected) opposed this.
In deciding that the LDC was not a penalty clause, Jackson MJ clarified the position the courts would now take in distinguishing between a valid LDC and a penalty clause-
• As had traditionally been required, the sum stated in the LDC must be a genuine pre-estimate of the likely loss to be suffered by the aggrieved party.
• For an agreed pre-estimate to be termed unreasonable (for it not to be a genuine pre-estimate) there must be “a substantial discrepancy between the level of damages stipulated in the contract and the level of damages...likely to be suffered”.
• The “genuine” pre-estimate test does not turn on the genuineness or honesty of the party making the estimate, although the court can take account of the thought processes of both parties at the time of contracting and agreeing to the LDC.
Earlier Cases and the Approach of the Courts
• Lord Dunedin in Commissioner of Public Works v Hills [1906] (on what constitutes a penalty clause)- whether the sum (of liquidated damages) stipulated for can...be regarded as a ‘genuine pre-estimate’ of the creditor’s probable or possible interest in the due performance of the principal obligation”. In the case it was held that the LDC was not a genuine pre-estimate as the sum stipulated had the propensity to increase with no relation to the actual cost of the damage to the injured party.
Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage Co Ltd [1915] (on the factors the court will look at in determining whether a LDC is in fact a penalty clause)-
• Regardless of the label of the clause, it is for the court to analyse the substance of the clause and its wording, to be judged as at the time the contract was made.
• An LDC in the true sense is a “genuine pre-estimate of damage” whereas a penalty clause is a payment of money as stipulated made by the offending party “in fear”.
• Was there unequal bargaining power between the parties at the time of contracting, such that one party was effectively dictating terms? If so, the clause is likely to be a penalty.
• The clause is a penalty where “the sum stipulated is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach” and also where the same amount is payable under the clause, regardless of the nature or seriousness of the breach.
• “It is no obstacle to the sum stipulated being a genuine pre-estimate...if the consequences of the breach are such as to make precise pre-estimation almost an impossibility”.
What is a “Genuine Pre-Estimate of Loss”?
• Dunlop- The court will look at the likely damages in the ordinary course of events, not the conceivable damages. Key question- are the agreed liquidated damages an estimate of the likely loss to the injured party arising from the breach or is the amount a deterrent?
• Tilebox- Honesty and accuracy are not associated with whether a stipulated amount can be considered a “genuine” pre-estimate of loss.
Two Examples:-
Campbell Discount Co Ltd v Bridge [1962]- An LDC held to be a penalty clause because the clause provided a sliding scale which operated in the wrong direction- i.e. the less the depreciation in the value of the vehicle, the greater the compensation that the offending party had to pay- the clause clearly acted as a deterrent.
Philips v The Attorney General of Hong Kong [1993]- An LDC within a construction contract was held to be enforceable because it represented a genuine pre-estimate of the probable loss, which had been formed at the time of contracting. This outweighed the fact that the injured party could receive an amount in excess of its actual loss as a result of the clause (which can give the impression that the clause is penal in nature).
Two Examples of an LDC:-
“If the contractor shall fail to complete by the date stipulated in the contract (or any extended date), he shall pay or allow the employer to deduct liquidated damages at the rate of £1000 per day for the period during which the works are uncompleted.”
“The sub-contractor shall pay liquidated damages of £10,000 per day, or any sum imposed on the Main Contractor, whichever sum is greater, for delay in the sub-contract works or any loss or damages incurred by the Main Contractor.”
The first LDC is fairly standard in its wording (being present in many construction contracts). Lurking beneath these LDCs though are real issues as to whether such clauses would stand up to court scrutiny or whether they would be dumped in the “penalty” bin (to the horror of the party attempting to rely on it).
The Azimut-Benetti decision potentially widens the scope and enforceability of LDCs- as long as the stipulated amount is “commercially justifiable” and not intended to be a deterrent it is likely to be classed as an enforceable clause by the courts. This is likely to be the case even if a discrepancy remains between the amount payable under the clause and the amount of actual loss suffered by the injured party because we are now in a position whereby the courts are loathe to interfere where two commercially experienced parties have agreed to a LDC because of the uncertainty this would create.
Conclusion
The decision in Azimut - Benetti demonstrates that the courts are increasingly adopting a flexible approach towards the interpretation of LDCs and it may be commented with some degree of certainty that whilst the first of the above clauses would be regarded as a typical LDC, it is now arguable that the second clause (which would not have survived the previous approach of the courts) may also be classed as enforceable so long as it was negotiated freely and was deemed “commercially justifiable”.
Therefore, parties would now be advised to incorporate some justification for the LDC and also to calculate the sum in the LDC by reference to a genuine pre-estimate of loss for a particular breach. If possible, workings and/or a record of negotiations as to how the figure was arrived at should also be retained in the event that the LDC is challenged.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
What Are LDCs?
LDCs can be described as a contractual term which two parties have agreed upon which states that the injured party can recover (upon a specific breach by the offending party) a specified sum of money. Put in a construction context, this specific breach is late completion of a construction project. The sum articulated in the LDC is often expressed as an amount per day or per week.
Such clauses will not be considered enforceable by the courts if it is determined that its purpose is to punish rather than to compensate the injured party, i.e. it is a penalty.
The Current Law
Although not a construction case, the Azimut-Benetti v Healey decision will have an effect across the construction industry, given its impact and shift in approach towards how the courts will now analyse LDCs.
Briefly, the facts of this case concerned Azimut-Benetti (a luxury yacht builder in Italy) entering into a contract with a company owned by Mr Darrell Marcus Healey to construct a yacht for €38m. The relevant LDC provided:
“Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the builder will promptly return the balance of sums received from the Buyer together with the Buyer’s Supplies if not yet installed in the Yacht.”
When the Defendant’s company failed to pay the first agreed 10% instalment, the Claimant terminated the contract and proceeded to make a summary judgment action to claim 20% of the contract price under the LDC. Meanwhile, the Defendant argued the LDC was unenforceable as a penalty.
Decision
In deciding the case, Blair J departed from previous case law by moving towards a “commercial justification” test; namely that a LDC “may be commercially justifiable provided that its dominant purpose is not to deter the other party from breach”. Blair J held this was the case in this instance- the purpose of the clause was evidently to strike a balance between the interests of both parties should the Claimant lawfully terminate the contract (this was evidenced through the fact that the clause also made provision for the offending party to receive the balance of any sums already paid to the injured party as well as any supplies not yet used in the construction of the yacht).
Significantly, Mr Justice Blair set out:-
• Because the LDC had a clear commercial and compensatory justification for both parties, it was not a penalty and was therefore enforceable.
• Where both contracting parties are legally represented and have freely entered the contract, the court should (as much as possible) uphold the agreed contractual terms.
The Pre- Azimut-Benetti Interpretation Framework
In the Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] case, the LDC made the provision “Alfred McAlpine should pay liquidated and ascertained damages for delay at the rate at the rate of £45,000 per week or part thereof”. Sometime after the contract had been entered, it became clear that completion of the works would not take place until June 2005 (some two and a half years later than the anticipated completion date expressed in the contract - 14 August 2002).
This meant the LDC came into play- McAlpine was seriously concerned regarding its liability under the clause and proceeded to run the argument in court that the LDC was excessive and so amounted to an unenforceable penalty clause. Tilebox (as expected) opposed this.
In deciding that the LDC was not a penalty clause, Jackson MJ clarified the position the courts would now take in distinguishing between a valid LDC and a penalty clause-
• As had traditionally been required, the sum stated in the LDC must be a genuine pre-estimate of the likely loss to be suffered by the aggrieved party.
• For an agreed pre-estimate to be termed unreasonable (for it not to be a genuine pre-estimate) there must be “a substantial discrepancy between the level of damages stipulated in the contract and the level of damages...likely to be suffered”.
• The “genuine” pre-estimate test does not turn on the genuineness or honesty of the party making the estimate, although the court can take account of the thought processes of both parties at the time of contracting and agreeing to the LDC.
Earlier Cases and the Approach of the Courts
• Lord Dunedin in Commissioner of Public Works v Hills [1906] (on what constitutes a penalty clause)- whether the sum (of liquidated damages) stipulated for can...be regarded as a ‘genuine pre-estimate’ of the creditor’s probable or possible interest in the due performance of the principal obligation”. In the case it was held that the LDC was not a genuine pre-estimate as the sum stipulated had the propensity to increase with no relation to the actual cost of the damage to the injured party.
Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage Co Ltd [1915] (on the factors the court will look at in determining whether a LDC is in fact a penalty clause)-
• Regardless of the label of the clause, it is for the court to analyse the substance of the clause and its wording, to be judged as at the time the contract was made.
• An LDC in the true sense is a “genuine pre-estimate of damage” whereas a penalty clause is a payment of money as stipulated made by the offending party “in fear”.
• Was there unequal bargaining power between the parties at the time of contracting, such that one party was effectively dictating terms? If so, the clause is likely to be a penalty.
• The clause is a penalty where “the sum stipulated is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach” and also where the same amount is payable under the clause, regardless of the nature or seriousness of the breach.
• “It is no obstacle to the sum stipulated being a genuine pre-estimate...if the consequences of the breach are such as to make precise pre-estimation almost an impossibility”.
What is a “Genuine Pre-Estimate of Loss”?
• Dunlop- The court will look at the likely damages in the ordinary course of events, not the conceivable damages. Key question- are the agreed liquidated damages an estimate of the likely loss to the injured party arising from the breach or is the amount a deterrent?
• Tilebox- Honesty and accuracy are not associated with whether a stipulated amount can be considered a “genuine” pre-estimate of loss.
Two Examples:-
Campbell Discount Co Ltd v Bridge [1962]- An LDC held to be a penalty clause because the clause provided a sliding scale which operated in the wrong direction- i.e. the less the depreciation in the value of the vehicle, the greater the compensation that the offending party had to pay- the clause clearly acted as a deterrent.
Philips v The Attorney General of Hong Kong [1993]- An LDC within a construction contract was held to be enforceable because it represented a genuine pre-estimate of the probable loss, which had been formed at the time of contracting. This outweighed the fact that the injured party could receive an amount in excess of its actual loss as a result of the clause (which can give the impression that the clause is penal in nature).
Two Examples of an LDC:-
“If the contractor shall fail to complete by the date stipulated in the contract (or any extended date), he shall pay or allow the employer to deduct liquidated damages at the rate of £1000 per day for the period during which the works are uncompleted.”
“The sub-contractor shall pay liquidated damages of £10,000 per day, or any sum imposed on the Main Contractor, whichever sum is greater, for delay in the sub-contract works or any loss or damages incurred by the Main Contractor.”
The first LDC is fairly standard in its wording (being present in many construction contracts). Lurking beneath these LDCs though are real issues as to whether such clauses would stand up to court scrutiny or whether they would be dumped in the “penalty” bin (to the horror of the party attempting to rely on it).
The Azimut-Benetti decision potentially widens the scope and enforceability of LDCs- as long as the stipulated amount is “commercially justifiable” and not intended to be a deterrent it is likely to be classed as an enforceable clause by the courts. This is likely to be the case even if a discrepancy remains between the amount payable under the clause and the amount of actual loss suffered by the injured party because we are now in a position whereby the courts are loathe to interfere where two commercially experienced parties have agreed to a LDC because of the uncertainty this would create.
Conclusion
The decision in Azimut - Benetti demonstrates that the courts are increasingly adopting a flexible approach towards the interpretation of LDCs and it may be commented with some degree of certainty that whilst the first of the above clauses would be regarded as a typical LDC, it is now arguable that the second clause (which would not have survived the previous approach of the courts) may also be classed as enforceable so long as it was negotiated freely and was deemed “commercially justifiable”.
Therefore, parties would now be advised to incorporate some justification for the LDC and also to calculate the sum in the LDC by reference to a genuine pre-estimate of loss for a particular breach. If possible, workings and/or a record of negotiations as to how the figure was arrived at should also be retained in the event that the LDC is challenged.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
Agency Workers Regulations 2010
October 2011 is going to be a time of change in the workforce. The rules on agency workers are going to alter quite significantly, as the full effect of the Agency Workers Directive comes into force. These new laws will cover anyone who falls under the definition of an Agency Worker, which is anyone who is 'an individual who is supplied by a temporary work agency to work temporarily for and under the direction of a hirer.' Any organisations which contract directly with the worker, so that there is no agency introduction or administration involved, are not covered by these Regulations. There are estimated to be 1.3 million workers in the country who are employed through an agency, so the changes that these Regulations are going to have on the workforce cannot be underestimated.
The Regulations are designed to protect situations where agency workers are the second class in the workforce. Up until now, it has been fine for an agency worker's pay – normally at an hourly rate – to be less than the pay received by permanent workers doing the exact same job. This has led to situations where agency staff work longer and harder than permanent staff, but for less pay. Agency staff, by virtue of their employment status, have the least rights. They are therefore the least likely to complain, and in turn, are the workers who are the most likely to be exploited. In hard economic times, such exploitation is inevitably more pronounced, with companies needing to cut costs wherever possible.
The Regulations state that from when they come into effect, the agency worker's pay received will have to be the same rate as that received by permanent staff. Agency workers will also be entitled to all of the basic working and employment conditions as if they had been employed directly. This will include the lengths of their shifts, the right to take holidays, the right to have rest breaks, and equal treatment concerning shifts of unsociable hours.
This does not mean that they are entirely equal to permanent employees. The rights do not extend to occupational sick pay, pension entitlements, maternity or paternity leave, share options or profit share schemes. Furthermore, the agency worker does not at any point gain the right not to be unfairly dismissed, or the right to a redundancy pay.
To determine their rights, the agency worker would have to find an actual permanent worker of the hirer, who is doing a comparable role to their own. In other discrimination cases, for example relating to disability or gender, a worker can rely on a hypothetical comparator to prove that they are being treated worse than a colleague. To prove a case, an agency worker would need a real colleague who is doing the same job as them, but being treated better, to compare themselves to.
An agency worker also has another hurdle to overcome in proving a case. They would have to be working for the hirer for 12 weeks. This was a clause which the government, the CBI and the TUC agreed as a suitable opt-out which allows industry to have some flexibility. This means that workers on a contract shorter than 12 weeks can be paid less than workers of the hirer, even if they are doing the exact same role.
The business industry is clearly worried about the financial implications of this. To fill temporary roles, they not only have to pay the agency fees, but they have to pay the worker the exact same hourly pay as their permanent members of staff. This means that the agency worker, on the face of it, can cost the business more than the permanent member of staff. It is worth remembering, however, that the agency worker does not get paid when they are on leave or off sick, and they don't have any pension that needs contributing to. Furthermore, the business can quickly dispose of them when they are surplus to requirements, without having to follow any cumbersome procedures. A business can take comfort in the fact that when they take on agency workers, the end result is very unlikely to result in litigation when things go wrong. This comfort, of course, will now come at a higher price.
Businesses often complain that the employment laws are stacked against employers, and in the recession that we are currently in, these new Regulations will no doubt appear as another blow to managers trying to keep their workforce in employment in the first place. For those who champion workers' rights, however, these Regulations have been eagerly anticipated, and are long overdue.
The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
The Regulations are designed to protect situations where agency workers are the second class in the workforce. Up until now, it has been fine for an agency worker's pay – normally at an hourly rate – to be less than the pay received by permanent workers doing the exact same job. This has led to situations where agency staff work longer and harder than permanent staff, but for less pay. Agency staff, by virtue of their employment status, have the least rights. They are therefore the least likely to complain, and in turn, are the workers who are the most likely to be exploited. In hard economic times, such exploitation is inevitably more pronounced, with companies needing to cut costs wherever possible.
The Regulations state that from when they come into effect, the agency worker's pay received will have to be the same rate as that received by permanent staff. Agency workers will also be entitled to all of the basic working and employment conditions as if they had been employed directly. This will include the lengths of their shifts, the right to take holidays, the right to have rest breaks, and equal treatment concerning shifts of unsociable hours.
This does not mean that they are entirely equal to permanent employees. The rights do not extend to occupational sick pay, pension entitlements, maternity or paternity leave, share options or profit share schemes. Furthermore, the agency worker does not at any point gain the right not to be unfairly dismissed, or the right to a redundancy pay.
To determine their rights, the agency worker would have to find an actual permanent worker of the hirer, who is doing a comparable role to their own. In other discrimination cases, for example relating to disability or gender, a worker can rely on a hypothetical comparator to prove that they are being treated worse than a colleague. To prove a case, an agency worker would need a real colleague who is doing the same job as them, but being treated better, to compare themselves to.
An agency worker also has another hurdle to overcome in proving a case. They would have to be working for the hirer for 12 weeks. This was a clause which the government, the CBI and the TUC agreed as a suitable opt-out which allows industry to have some flexibility. This means that workers on a contract shorter than 12 weeks can be paid less than workers of the hirer, even if they are doing the exact same role.
The business industry is clearly worried about the financial implications of this. To fill temporary roles, they not only have to pay the agency fees, but they have to pay the worker the exact same hourly pay as their permanent members of staff. This means that the agency worker, on the face of it, can cost the business more than the permanent member of staff. It is worth remembering, however, that the agency worker does not get paid when they are on leave or off sick, and they don't have any pension that needs contributing to. Furthermore, the business can quickly dispose of them when they are surplus to requirements, without having to follow any cumbersome procedures. A business can take comfort in the fact that when they take on agency workers, the end result is very unlikely to result in litigation when things go wrong. This comfort, of course, will now come at a higher price.
Businesses often complain that the employment laws are stacked against employers, and in the recession that we are currently in, these new Regulations will no doubt appear as another blow to managers trying to keep their workforce in employment in the first place. For those who champion workers' rights, however, these Regulations have been eagerly anticipated, and are long overdue.
The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.
This article contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances.
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