Warranties and Representations

It is common in share purchase agreements for the warranty clause (the first draft of which is prepared by the Buyer's solicitors) to use wording such as "The Sellers warrant, represent and undertake that…"  Whilst this may just be a case of lawyers preferring to use three words when one will do, there is often more to the use of such language than meets the eye.

A warranty is a contractual promise that something is so; e.g. that the Company does not have any liability in respect of a particular matter.  If that turns out not to have been so, the Buyer has a claim for breach of contract.  Such claims are subject to carefully-negotiated limitations of the Buyer’s liability under the share purchase agreement; typically a cap of the amount of purchase price received, a minimum threshold for claims, and a time limit for bringing claims of 1 to 3 years (or 6 or 7 years where tax is involved).

A representation is a statement of fact that induces a party to enter into a contract.  If it turns out to have been untrue, the other party may claim damages for misrepresentation.  This is a claim in tort (a legal wrong), not a claim for breach of contract, and the damages are calculated differently.  The limitations of liability in the share purchase agreement are not usually drafted to cover liability for misrepresentation.  This is why buyers’ solicitors try to include the language of representation, and sellers’ solicitors seek to delete it.  Such deletions are usually accepted without serious argument - though private equity investors' solicitors may take a tougher line, and be in a stronger negotiating position.

An undertaking is a contractual promise to do something (or not to do it).  This is completely inappropriate language for the warranties in a share purchase agreement, and is either bad drafting or a cunning attempt to hide the word "represent” amongst some apparent bad drafting.

Acting for the Seller, one therefore always seeks to avoid the language of representation, and to include the usual boilerplate "entire agreement" clause to the effect that this is the entire agreement between the parties, it supersedes all prior negotiations, and the Buyer acknowledges it is not relying on any previous representations.  This language is intended to exclude liability for misrepresentation, and with an express exception for liability for fraudulent misrepresentation is generally considered to be reasonable if negotiated at arms’ length between commercial parties with the benefit of legal advice (This is important because under the Misrepresentation Act 1967 liability for misrepresentation can only legally be excluded to the extent the exclusion is reasonable.)

In the case of Idemitsu Kosan Co Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) (27 July 2016), Idemitsu were out of time for bringing a contractual claim for breach of warranty under a share purchase agreement (the agreed 18 month time limit for non-tax warranty claims having expired without a claim having been made), so they sought to get round this by bringing a claim for misrepresentation under s.2(1) of the Misrepresentation Act 1967.  Sumitomo responded with an application under CPR Part 24 for summary judgment dismissing that claim, on the basis that it had no real prospect of success and there was no other compelling reason why it should be disposed of at a trial.

Such cases always depend on the wording of the agreement, and Idemitsu were in some difficulty there, as the relevant clauses only used the language of warranties.  The word "representation" only appeared in the entire agreement clause, apparently intended to exclude them.  However there were conflicting previous cases on the point: in one Arnold J. had decided that warranties could of themselves amount to representations, and in another Mann J. had decided that they could not.  Both are eminent judges.  Idemitsu’s Counsel also ran a clever argument that by putting forward the agreement with the warranties for execution, Sumitomo had made representations inducing Idemitsu to enter into the agreement.  The target Company had interests in North Sea oil and gas fields, had been sold for US$575M, and Idemitsu was seeking to recover a claimed loss of US$105.9M (as against a contractual cap on warranty claims of US$1,5M) relating to liability for sharing the operating expenses of a floating production storage and offshore loading vessel.  So it must have seemed worth a try.

Andrew Baker QC sitting as a judge of the High Court was unconvinced by Idemitsu’s Counsel’s arguments, and preferred the reasoning of Mann J. from the previous cases.  He held that a warranty is (without further language) a contractual promise: nothing less, but nothing more.  He upheld the entire agreement clause as effective to exclude misrepresentations, of which there were none.  He therefore gave judgment for the defendant.

The case is welcome confirmation that my deletions of representation wording when acting for sellers were not in vain, and should be of comfort to sellers that their limitations on liability do mean what they thought they did.  However, given the amount at stake and the conflicting first-instance decisions, it may still go to the Court of Appeal.

Can discrimination claims be an abuse of rights?

In the case of Nils-Johannes Kratzer v R+V Allgemeine Versicherung AG the Court of Justice of the European Union had to decide whether a person who was clearly not seeking employment, but merely the status of applicant in order to bring claims for compensation, was qualified to bring such claims under the EU Directives on age and sex discrimination.  Was this an abuse of rights under EU law?’

In March 2009 R+V advertised trainee positions for graduates in the fields of economics, mathematical economics, business informatics and law.  Mr Kratzer applied for a legal trainee position, emphasising that he fulfilled all the requirements in the advertisement and his experience as a lawyer and former manager with an insurance company.  When his application was rejected, Mr Kratzer responded with a written complaint demanding compensation of EUR 14,000 for age discrimination.

R+V invited Mr Kratzer to an interview with its head of HR, stating that the rejection of his application had been automatically generated and was not in line with its intentions.  But Mr Kratzer declined the invitation and suggested a discussion of his future with R+V once his compensation claim had been satisfied.

He then brought an action for the EUR 14,000 for age discrimination before the Wiesbaden Labour Court in Germany, and on finding out that R+V had awarded the four trainee posts to women only, although the 60+ applicants were divided almost equally between men and women, he increased his claim by EUR 3,500 for sex discrimination.

The Wiesbaden Labour Court dismissed the action, and the Hesse Regional Labour Court dismissed his appeal.  He appealed again to the German Federal Labour Court, which referred the above questions to the CJEU for a ruling.  The CJEU delivered its judgment on 28 July 2016 - over 7 years after the dispute first arose.

Unsurprisingly, the CJEU gave Mr Kratzer’s claims short shrift.  Dispensing with the usual Advocate General’s Opinion and looking at the underlying purpose of the Directives to ensure equal treatment of persons seeking employment, they held that “a situation in which a person who in making an application for a post does not seek to obtain that post but seeks only the formal status of applicant with the sole purpose of seeking compensation does not fall within the definition of ‘access to employment, to self-employment or to occupation’, within the meaning of those provisions, and may, if the requisite conditions under EU law are met, be considered to be an abuse of rights”.  They left the decision on costs of the case to the referring court, which one suspects is unlikely to rule in favour of Mr Kratzer if he has been abusing his rights.

Courts are never going to be sympathetic to claimants who are merely seeking compensation without having suffered a genuine loss.  Mr Kratzer’s mistake would appear to have been making payment of the compensation a precondition to the job interview.  If he was genuinely interested in the job, he should have reserved his rights and gone ahead with the application.  R+V would then have had the opportunity (if well-advised) to carry out a scrupulously fair and documented selection process for all the applicants, which could have been used in defence of his claim if he was ultimately rejected.

The case is of some comfort to companies who receive speculative discrimination claims for job applicants - though they would do well to note R+V’s careful initial response.

No Snoopers' Charter for Employers

The case of Barbulescu v Romania, in which the European Court of Human Rights gave judgment on 12 January 2016, was widely claimed in the press to have given the green light to employers to monitor their employees' emails for personal use.  It is true that the employer's monitoring of the employee's emails was upheld by the ECHR in that case, but the facts were somewhat unusual and the actual decision was more nuanced.

Mr Barbelescu worked for a company in Bucharest as an engineer in charge of sales.  His employer asked him to create a Yahoo Messenger account for responding to clients' enquiries.  The company had a policy that "It is strictly forbidden to disturb order and discipline within the company’s premises and especially ... to use computers, photocopiers, telephones, telex and fax machines for personal purposes."  When the employer informed Mr Barbulescu that it had monitored his Yahoo Messenger communications over the course of a week and that it considered he had used the account for personal purposes in contravention of this policy, he replied in writing that he had only used it for professional purposes. The employer responded with a 45 page transcript of his Messenger communications for that week, including messages with his brother and his fiancee that contained intimate personal information about his health and sex life. The employer disciplined Mr Barbulescu and dismissed him for unauthorised personal use of the internet.

The ECHR held by a majority that Mr Barbelescu's right to privacy for his correspondence under Article 8 had been engaged, but that the interference had been proportionate within the State's margin of appreciation.  Previous cases that had gone the other way were distinguished on the basis that in those cases the employer had tolerated some personal use of the internet.  The Romanian courts in this case had considered it important  that the employer accessed the Yahoo Messenger account in the belief that it contained only professional communications (as the employee had claimed). It was not unreasonable for an employer to want to verify that employees are working during working hours.  The monitoring was limited in scope and therefore proportionate.

Whilst the Barbeslescu case is an example of an employer's monitoring of an employee's emails being upheld, it actually held that the right to privacy applies, and the monitoring was only justified on the basis of the strict policy forbidding personal use and the employee's specific denial of any breach of that policy.  Most employers in the UK do allow some personal use of work computers and telephones, and in such cases a clear policy that they will be monitored to check there is no abuse needs to be clearly communicated to employees and any such monitoring needs to be proportionate.

The Information Commissioner's Employment Practices Code provides some useful guidance to employers on monitoring communications in Part 3.

No safe harbour in the US

As has been widely reported, on 6 October 2015 the Court of Justice of the European Union gave judgment in the case of Maximillian Schrems v the Data Protection Commissioner for Ireland, holding that the European Commission Decision creating the "safe harbour" for the transfer of personal data from the EU to the US was invalid.

European data protection law prohibits the transfer of personal law outside the EU except to a country which "ensures an adequate level of protection" for personal data or where certain exceptions apply - for example where the data subject has given "unambiguous consent" to the transfer, or where "binding corporate rules" have been agreed to provide a contractual means of protection.  There is a very limited list of countries which have been found by the EU to ensure an adequate level of protection.  But, crucially, by Commission Decision 2000/520/EC of 26 July 2000 it included the EU/US "safe harbour" agreement, with which US companies could self-certify their compliance.  The US safe harbour was of vital importance to the large number of international businesses which transfer customer data to their US operations, and with the growing importance of the Cloud even companies with no US operations are increasingly storing data on servers which are physically located in the US - and have therefore been relying on their Cloud service providers' confirmation that they are signed up to the safe harbour.  (Or at least they should have been relying on it if they had properly addressed their minds to the issue.)

All this was thrown into doubt when Edward Snowden revealed that the US intelligence agencies, and in particular the NSA, carried out widespread and indiscriminate surveillance of data stored by US companies.  We now know that US companies have to give access to their data to the NSA, and so are unable to guarantee the necessary adequate level of protection for their personal data to persons in the EU, as the surveillance is carried out on an indiscriminate basis, rather than a proportionate basis where necessary for national security purposes - such as to combat terrorism.

Mr Schrems (who is an Austrian citizen) therefore brought a case requiring the Irish Data Protection Commissioner to prohibit Facebook Ireland (which held his personal data on Facebook) from transferring that data to servers operated by Facebook Inc in the US for processing.  The Irish High Court considered it was bound by Commission Decision 2000/520/EC on the safe harbour, but had its doubts as to the validity of the decision in the light of the Snowden revelations, so referred to the CJEU the question whether it was bound to follow the safe harbour Decision.

The CJEU held that it was not, and that national data protection authorities are not prevented by Commission Decisions from carrying out their own assessment.  However, the Court went on to take the opportunity to hold (despite not having been expressly asked to do so by the Irish court) that Decision 2000/520/EC is invalid - particularly in the light of subsequent revelations.

So where does this leave the many companies that have been relying on the safe harbour to transfer customer data to their US operations, or just to store it in the Cloud?  They cannot just wait and see what happens when the case goes back to the Irish court to decide in the light of the CJEU's guidance, as the CJEU has already held the safe harbour invalid.  Nor can they wait for the EU and US to conclude their current negotiations for an amended safe harbour, as that will take some time and they need to continue transferring personal data.  Binding corporate rules or standard contractual clauses in the form approved by the EU should be an option, but it is difficult to see how a US company could comply with any contractual data protection obligations it might undertake, given it would be bound to give the NSA access to its data.  There is a limited exception where "the transfer is necessary for the performance of a contract between the data subject and the controller", which might arguably be used to perform existing contracts with customers.  But for the moment, the only viable option seems to be to obtain the unambiguous consent of customers to transferring their data to the US by an express opt-in, warning them of the risk of surveillance by the NSA (in case anybody isn't already aware of this, or doesn't appreciate that it could happen in this case).  Realistically this would involve stopping providing the service to the customer unless they click to confirm their opt-in to a clear warning message.

The alternative is to find a non-US Cloud service provider with servers in the EU or a country which is still considered to offer adequate protection; the list being Andorra, Argentina, Canada, Faeroe Islands, Guernsey, Israel, Isle of Man, Jersey, New Zealand, Switzerland and Uruguay.

Companies can be discriminated against

In the recent case of EAD Solicitors LLP and others v Abrams, the Employment Appeal Tribunal has held that it is possible for a limited company to bring a claim of direct discrimination on the ground of age under section 13 of the Equality Act 2010.

Like many of the cases on age discrimination, the claim was against a firm of solicitors who sought to compulsorily retire a partner when he reached the retirement age in their Partnership Deed (nowadays an LLP Membership Agreement).  The twist here was that the partners were (for tax reasons) supplying their services to the firm (which was a Limited Liability Partnership) through personal service companies.  The member of the LLP that brought the claim of age discrimination was therefore the individual partner's personal service company, rather than the partner himself.

So how can you discriminate against a company on grounds of age?  The company itself was actually very young, having been incorporated only as the partner approached retirement, but it was allegedly being discriminated against on grounds of old age.

The answer is that the formulation of the test for direct discrimination in section 13 is:

"A person (A) discriminates against another (B) if, because of a protected characteristic, A treats B less favourably than A treats or would treat others."

The discrimination therefore just has to be "because of a protected characteristic" (in this case age).  Person B does not himself (or itself) have to have that characteristic.  This is what is known as "associative discrimination", where person B is discriminated against because he (or it) is associated with someone having the protected characteristic.  This is a well-established principle, which has been applied for example in cases where someone is dismissed from their job because they are caring for a disabled person or where they are disciplined for refusing to obey instructions to discriminate against customers on racist grounds.  The point which was decided in this case was that "person B" does not have to be a natural person, but can be a legal person such as a company.

Other forms of discrimination against companies are therefore possible.  The judge gave hypothetical examples of "a company being shunned commercially because it is seen to employ a Jewish or ethnic workforce; a company that loses a contract or suffers a detriment because of pursing an avowedly Roman Catholic ethic; one that suffered treatment because of its financial support for the Conservative Party or, say, for Islamic education; or one that was deliberately not favoured because it offered employment opportunities to those who had specific disabilities that were unattractive to some would-be contractors or because, let us suppose, of the openly gay stance of a chief executive."

The case only decided the claim could proceed as a preliminary point.  Whether this company was actually discriminated against, or whether the discrimination could be justified as a proportionate means of achieving a legitimate end (the usual way to retire older partners) remains to be decided.  It will also be interesting to see what damages can be claimed.  The company has clearly suffered loss of profits, but can it claim for injury to the feelings of its director?

Supreme Court Confirms Document Means What It Says

I have to say it makes a refreshing change to read a report of a case where the court upholds an unjust result.  Judges quite rightly seek to do justice in the cases that come before them when it is open to them to do so, but sometimes the principles of freedom of contract and commercial certainty mean that when a party has made a bad bargain, he will be held to it.

That was what happened in Arnold v Britton & others [2015] UKSC 36.  91 long leases were granted of chalets in a holiday park on the Gower Peninsula in South Wales, 25 of which contained a service charge provision in the following terms (with minor variations):

"To pay to the Lessor without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year or part thereof."

21 of such leases were granted between 1977 and 1991.  The other 70 leases had been granted between 1974 and 1977 and provided for the service charge to increase by 10% every 3 years rather than every 1 year.  4 of those 70 were then varied between 1988 and 2002 to provide for the yearly rather than 3 yearly increases.  Because of the compounding effect of the wording over the 99 year term of the leases, by expiry of all the leases in 2072 those with yearly increases would be paying over £550,000 per year by way of service charge, whilst those with 3 yearly increases would be paying about £1,900 per year.

The Lessees with the leases providing for yearly service charge increases therefore sought to challenge the service charge clause in the courts.  The County Court judge decided in their favour, interpreting the clause as meaning they had to pay a "proportionate part" of the costs to the Lessor, capped by the formula in the second part of the clause.  On appeal, the High Court judge, the Court of Appeal and the Supreme Court (by a 4 to 1 majority) all decided that the meaning of the clause was clear: that the Lessees had to pay a fixed service charge of £90 compounding by 10% yearly.  Only Lord Carnwarth in the Supreme Court disagreed, preferring the County Court judge's interpretation.

Lord Neuberger, giving the leading judgement in the Supreme Court, was clear that where the natural meaning of the words used by the parties was clear, there was no room for the court to depart from them by reference to principles such as commercial common sense: "while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party."

He also pointed out that the purpose of a fixed service charge clause was to provide certainty and avoid arguments over the lessor's actual expenditure and its reasonableness, and that inflation had been running at well over 10% per annum between 1974 and 1981, and over 15% per annum for six of those eight years; although it was less than 10% per annum after 1981.  In other words, although it was ill-advised for the then lessees to have entered into leases in such terms, it was understandable in the circumstances of the time.

The Lessor had also (perhaps wisely) indicated that she was prepared to renegotiate the 25 leases to a formula linked to the Consumer Price Inflation index, so a just result may ultimately be achieved.

It is good to be able to advise clients that the clear words of their contracts will be enforced by the courts if necessary.  The tricky bit, of course, is knowing when the words are clear.  8 out of 10 learned judges thought they were perfectly clear in this case, but 2 thought they were sufficiently unclear to permit an alternative interpretation.  Does that mean they were only 80% clear?

"Parking Charge" not a Penalty

Most motorists are no doubt outraged by the high charges car park operators make if you have overstayed your parking time, even by a minute.  Nowadays these charges are enforced by cameras with automatic number plate recognition, so are not easily avoided.  But can you challenge them if the car park operator takes you to court?

We now have a case on the subject.  In Parkingeye Ltd v Beavis [2015] EWCA Civ 402 the Court of Appeal considered an appeal by Mr. Beavis against a “Parking Charge” of £85 made by Parking Eye when he overstayed the 2 hours permitted period of free parking in the car park at the Riverside Retail Park in Chelmsford by nearly an hour.  About 20 signs were prominently displayed at the car park.  According to the judgment “The signs are worded as follows (the words I have underlined being especially large and prominent, and the words I have italicised being in small print but still legible if one wished to read them)

Parking Eye car park management

2 hour max stay

. . .

Failure to comply . . . will result in Parking Charge of £85

. . .

Parking Eye Ltd is solely engaged to provide a traffic space maximisation scheme. We are not responsible for the car park surface, other motor vehicles, damage or loss to or from motor vehicles or user's safety. The parking regulations for this car park apply 24 hours a day, all year round, irrespective of the site opening hours. Parking is at the absolute discretion of the site. By parking within the car park, motorists agree to comply with the car park regulations. Should a motorist fail to comply with the car park regulations, the motorist accepts that they are liable to pay a Parking Charge and that their name and address will be requested from the DVLA.

Parking charge Information: A reduction of the Parking Charge is available for a period, as detailed in the Parking Charge Notice. The reduced amount payable will not exceed £75, and the overall amount will not exceed £150 prior to any court action, after which additional costs will be incurred.

This car park is private property."

It was not disputed that the signs were reasonably large, prominent and legible, so that any reasonable user of the car park would be aware of their existence and nature and would have a fair opportunity to read them if they wished, nor that this gave rise to a contract between Mr. Beavis and Parking Eye.

Mr. Beavis challenged the £85 parking charge as being:

1. unenforceable as a penalty at common law; and
2. unfair and therefore unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations 1999.

He lost before the judge at first instance, and obviously felt strongly enough about the issue to appeal to the Court of Appeal.  The Consumers’ Association intervened in the case, so must also have felt the issues were of importance to consumers.

At first sight, one would have thought this was obviously a penalty, as it was not a genuine pre-estimate of Parking Eye’s loss (they being simply contracted to manage the free parking facility for the benefit of shoppers) and was clearly intended as a deterrent.  However, the Court of Appeal reviewed the case law on the subject, culminating in the recent case of El Madkessi (which is still under appeal to the Supreme Court) and noted that “The modern approach to penalty clauses suggested that a clause might not be a penalty, even though it did not contain a genuine pre-estimate of loss, if its dominant purpose was not to deter breach and the fact that there was a good commercial justification for it might lead to the conclusion that that was not the case. The clause would be a penalty only if the sum stipulated was extravagant and unconscionable.”

Here the provision of a 2 hour free parking facility for the benefit of shoppers and the need to keep the car park from becoming full, the fact that the charge needed to be sufficient to cover the costs of enforcement and was in line with the charges made by local authorities all amounted to commercial justification.  The Protection of Freedoms Act 2012 also allowed the recovery of parking charges of this nature that had clearly been brought to the attention of motorists.  In these circumstances £85 was not considered extravagant and unconscionable by the Court, and the charge was therefore held not to be a penalty.

The list of potentially unfair terms in the 1999 Regulations includes “terms which have the effect of requiring a consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation”. The parking charge would have been unfair if Parking Eye had “acted contrary to the requirements of good faith” in imposing it and if “that term caused a significant imbalance in the parties' rights and obligations under the contract to the detriment of the motorist”.  Given that the signs were prominently displayed, the Court held there was no lack of good faith, and the same factors as led to the clause not being a penalty were sufficient for there to be no such significant imbalance.

Mr. Beavis therefore had to pay his £85 parking charge, plus presumably rather more in legal fees.  It would only have cost him £50 if he had taken advantage of the discount for prompt payment.

So we now know that a “parking charge” of about £85 is likely to be recoverable, at least if the notices drawing it to motorists’ attention are sufficiently prominent and clearly worded.  Presumably there must come a point at which such a charge is so clearly in excess of the industry norm (as charged by local authorities and others, and which no doubt will increase over time) as to be “extravagant and unconscionable” but we do not yet know what that point would be and it would take a brave (or really outraged) motorist to test it again before the courts.

Update: on 4 November 2015 the Supreme Court gave judgment in the joined appeals in Cavendish v El Makdessi and ParkingEye v Beavis, deciding that the clauses in both cases were not penalties, and therefore allowing the appeal in the former and dismissing Mr. Beavis' appeal against the Court of Appeal decision discussed above.