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Problem Solved

Co-Director Dispute and No Agreement

By | Food for thought, news, Problem Solved

Quite regularly, a company will end up in a situation where directors no longer see eye to eye and reach a level of “deadlock”.

And unfortunately, with lots of companies not having shareholders agreements, it can be difficult to know where to go from there.

Generally speaking, if there’s a deadlock and no shareholders agreement, the best outcome is usually a negotiated settlement which avoids expensive litigation.

Both of the parties can be encouraged by the Solicitors to make a hard and positive effort to come up with pragmatic solutions, perhaps with the help of a mediator through Alternative Dispute Resolution, to avoid ending up in court.

If a settlement cannot be reached there are several options, including winding-up, a buyout by one side or the other, or a solvent liquidation.

Who can help you reach a settlement?

Well firstly, a solicitor…

In my opinion, it’s vital you instruct a solicitor to assist you negotiate a settlement – you need to understand your legal entitlements and alternatives, so you can negotiate from a position of strength.

Also, there are various ways a party’s minority or majority shareholding can be valued and it’s vital to know what your shares are worth before you commence any negotiations.

And secondly, a mediator…

As stated above, employing the services of a mediator is a good alternative to all-out war.

Mediation is a process where a trained mediator, as a third party, tries to knock the parties’ heads together (and sometimes knocks their Solicitors’ head together as well!) to explore a mutual resolution to the dispute.

We can arrange a mediation with a skilled mediator in this area at very short notice, so if you are ever in need, please get in touch.

Mediation often ends up with binding legal agreements, and in our experience, if both parties are competently advised, and know their real weaknesses and strengths, mediation is often successful.

What if all negotiation fails and mediation fares no better?

 You’re then in the realm of litigation:

Your litigation options include:

  1. Claim or injunction for a breach of another Director’s statutory duties;
  2. A derivative action by minority shareholder (see blog post 3 weeks ago);
  3. An unfair prejudice petition (we will deal with this in more detail next week!).

The court has significant discretions in making decisions in all of these areas and it is vital to take competent advice from Solicitors who understand how judges approach these matters before starting.

John

When shareholders cannot agree – Texas Shootout or Russian Roulette?

By | Food for thought, news, Problem Solved

As promised, this week we’re focusing on what happens when there’s an irresolvable deadlock between a company’s shareholders who have an agreement with one of these provisions.

When shareholders simply cannot agree, and the conflict is deemed irresolvable, one of the parties may serve a notice offering to purchase or sell at a specified price.

For example, A and B each hold 50 shares in Comp Ltd. They fall out.

Russian Roulette

A serves notice on B offering to transfer all A’s shares in the company to B at a price specified by A.

B must accept A’s offer and buy A’s shares at the stated price or must sell all his shares to A at the same price per share.

Texas Shootout

Also called a Mexican shoot out. It is a variation of a Russian roulette provision where typically A and B submit sealed bids to an “auctioneer” and the party who makes the higher bid buys the company at that price.

Both Russian Roulette and Texas Shootout only really operate fairly if the parties are of approximately equal financial strength, the shares of the other are affordable, and neither has a unique role in the company.

If Russian Roulette or Texas Shootout are not going to be appropriate mechanisms, a shareholders agreement can also provide for a valuation of the shares and a sale to the remaining shareholder(s), or to the outside world.

But what if A and B don’t have a shareholders agreement? We’ll explore that next week.

Disagreements and personal differences

By | Food for thought, news, Problem Solved

A good company board is one of the keys to a well-run business, and if it’s doing its job, it should identify key issues that need to be resolved for development to take place, generate a constant flow of ideas and engage in regulated decision making.

That all sounds beautiful, positive and progressive, but as we all know, it doesn’t always turn out that way.

The personal dynamism that the board relies upon can turn into disagreements which, if left to fester, can crystallise into acrimonious disputes.

Pushing disagreements under the carpet

If left underneath the surface these disagreements can undermine the smooth functioning of the board and thus the company’s performance and, ultimately, could threaten the company.

In the infinitely variable play of human conduct, disagreements can arise over strategy, financing of the company and remuneration, conflicts between Directors’ interest in the company and outside interests.

Most of these conflicts are underlined by:-

  1. Lack of a shareholders agreement;
  2. Personal differences.

So, what can you do about these conflicts?

Well, as they say, prevention is better than cure, so it would be my suggestion to work extremely hard to create a culture that minimises the two things that cause most conflicts.

Here are just a few ways to do that:

  1. Clarifying authority, roles and responsibilities;
  2. Establishing regular board meetings with an orderly process;
  3. Meeting outside the business – combining meetings with team activities;
  4. Ensuring the flow of full information to all board members;
  5. The Chairman being wise enough to draw out disputes between parties and drawing the poison (chair needs to be able to encourage Directors to reach a consensus during this process);
  6. Incorporating Alternative Dispute Resolution into the company’s culture.

Our next blog will look at how having a shareholders agreement, although it sounds dull and legalistic, can be an enormous help in preventing and resolving disputes.

John

A cosy relationship or a contract?

By | Problem Solved

The Problem

I have been working on a large building site for the past 6 months as a contractor.  The site has been split into 5 phases, and I have almost finished phase 2, and have submitted my tender for the next 3 phases.

I have done a few small jobs on phase 3 which I have been paid for at my tendered rates.  I have spoken to the contracts manager about a written contract for the remainder of phase 3 and phases 4 and 5, and he replied:  “Just crack on with it”.  But I have my reservations about doing this without a contract or at least a letter of intent.

I have had no problem with payment in the past from this company, and don’t expect any problems in the future.  I would like some advice about how to tackle the situation, as I do not want to upset what has so far been a good working relationship, and where I stand health and safety wise working on a phase of the site that I have no contract for.

Thanks in advance for your help.

Malcolm

Michael’s Response

Hello Malcolm.  Although I understand that you do not wish to upset a good client that has, no doubt, provided a good source of income, it is vital that you ensure you have a written contract in place before you start your next phases.

What you are essentially doing when you record the agreement in writing with your client, is taking out insurance on the contract.  No matter how big or small a construction project may be, the majority of contracts, once signed, will be stored and never the see the light of day again.  However, when there is a dispute, the second thing that a company will do (the first being to instruct its lawyers!), is to open the bottom drawer of the filing cabinet and take out the contract that has been laying there since the start of the project.

Letter of Intent

As regards to the so-called letters of intent, I am definitely not a fan!  A true letter of intent only expresses a party’s intention to enter into a contract at a future date.  Yet the number of letters I have seen that are headed ‘Letter of Intent’, are in fact binding agreements.  I understand that on some projects, there is a need to start the works very quickly, meaning that a contractor needs to be appointed on at least the work that is at the early stages of the programme. Where this happens, a combined Early Engagement Letter and Letter of Intent can be drafted, which allows a contractor to commence part of the works under a contract, whilst waiting for the main works contract to be drafted out.

Health & Safety

Regarding health and safety, although no doubt this will form part of your written contract, there will still be strict requirements that you will need to observe, which are implemented by statute, for example the CDM Regulations 2015.  As an employer you will have duties that are also governed by statute, for example to provide adequate information, instruction, training and supervision to enable your operatives to carry out their work in a safe manner.  Even self-employed persons have duties under the law in relation to their own health and safety, to ensure their work does not put others at risk.

Late Completion and Delay Damages

By | Problem Solved

The Problem

We entered into a contract to build 3 detached bungalows on the outskirts of Rugby.  The form of contract was not a usual standard form, but one that our client had drafted in-house, and it is fairly basic, which to be honest, suits us.

One of the terms that the contract did include was for a penalty if we failed to complete on time.  Unfortunately, we did not complete on time, and the client is now seeking a whopping £27,000 based on the 9 weeks that we were late completing.  Is there anything we can do?

Shaun

Response:

Ouch!  £27,000 is a big hit for your job to take.

Your problem relates to delay damages, and more specifically liquidated damages (e.g, the contract has set out a pre-determined periodic rate should you fail to complete on time).  I am therefore assuming that there is a valid liquidated damages clause in your contract and that there was a single date for completion.  I also assume that the rate for any delay caused to the date for completion as a result of contractor culpability was expressed as £3,000 per week (i.e. £3,000 x 9 weeks = £27,000).

Questions on delay damages have been quite frequent over the years, although since I last responded to a problem on liquidated damages (back in early 2013), the law has shifted, albeit because of a private parking charge case back in 2015, which my column touched upon in March 2016.

Prior to 2015, even where the parties had agreed in writing the rate of damages for delay, if challenged the employer must show that the liquidated damages rate was a genuine pre-estimate of the likely loss at the time they are fixed, otherwise the liquidated damages stated in the contract would not be enforceable (albeit the employer would not lose entitlement, but would then need to prove its losses).  This principle was established in the 1915 case of Dunlop Pneumatic Tyre Company Ltd. v New Garage and Motor Company Ltd.

Is a clause a penalty and enforceable?

In 2015, a dispute over a £85 private parking infringement notice went all the way to the Supreme Court.  The importance of this case however, was not the outcome, but the new test that the Supreme Court laid down for deciding if a clause is a penalty and thus unenforceable.  That new test was that the charge was neither “extravagant nor unconscionable”.

Until 2015 therefore, to successfully defend a challenge to a pre-determined loss, all the innocent party needed to show was that the sum was a genuine pre-estimate of the likely loss to be suffered at the time the sum was fixed.  Now, and providing that the innocent party has a legitimate interest in the sum claimed, the liquidated sum stipulated must not be extravagant or unconscionable when measured against those interests.  Quite what this means in practice is not yet clear and will no doubt be the subject of arguments in the future.

£3,000 per week for 3 bungalows, although high, I would say is probably seen as neither extravagant nor unconscionable.


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All Builders Problems Solved articles are a response to real problems experienced in the industry and we invite you to submit details of your own legal issues using the form at the bottom the Builders Problems Solved page. If your matter is used the advice is free. We do however assume we have your permission to publish the article on our website and on our social media platforms, although the names and details will be amended so that you may not be identified.

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Issue of the Final Certificate under the JCT Intermediate Building Contract 2011

By | Problem Solved

The Problem

Back in 2014, the building company I work for entered into a JCT Intermediate Building Contract 2011 to construct a large extension to a health and fitness centre for a well-known company.

Soon after work was started on site, it became obvious that the person, who had been nominated by the external building consultants as the contract administrator, was well out of her depth.  Fortunately, we took the initiative and ‘powered’ our way through the project, meeting the original date for completion.

The end of the defects period arrived in mid-2016, and having received the list of defects from the same contract administrator, we were pleased to receive the certificate of making good and the final certificate shortly after attending to the defects.  The final certificate had even agreed our final account and released the retention.  However, we have since hit a brick wall with the client, insofar that it is refusing to make payment against the final certificate on the basis that it not only disagrees with the level of the final amount certified, but is also claiming that the contract administrator should never had issued a certificate of making good defects because defects still exist with our works, which the contract administrator failed to note on her initial list of defects.

The monies that are owed were certified towards the back end of 2016, but the client has not issued a pay less notice.  Can you give any advice on how to proceed?

Jake, Stapleford.

Michael’s Response

In spite of what must have been a difficult project due to a ‘below-par’ contract administrator, your company deserves credit for achieving its obligations as to time, and no doubt your client, at least at the time of completion, must also have been pleased to have use of its new facilities on time.

Although you have mentioned that your client has not issued a pay less notice against the final certificate, which I would normally observe that in the absence of a timeous pay less notice, the amount certificate must be paid and then argued later, your overall situation is different with the contract administrator having issued the final certificate.

Under your form of contract, where the final certificate has been issued, this becomes conclusive evidence on matters such as the standard of workmanship and the quality of the materials are as described in the contract documents, or the adjusted contract sum is in accordance with the terms, unless challenged by some form of proceedings no later than 28 days after the final certificate has been issued.

I therefore recommend that you instigate [adjudication] proceedings, for the monies certified in the final certificate based on the absence of a timeous pay less notice.  Any proceedings that your client may instigate in relation to the recovery of [what it may see as] any over-payment, and / or alleged defects, notwithstanding latent defects, you have the evidence of the final certificate in defence to this.  If there were indeed defects outstanding at the time that the contract administrator issued the final certificate (even if the defects were simply missed by the contract administrator), you will not be liable to make good those defects and the only recourse for your client would be to bring a claim against the building consultant who employed the contract administrator.

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

What can your company do if you have signed up to a contract which automatically renews itself?

By | news, Problem Solved

What if your company has signed a contract with “Tie-you-in Limited” which contains an “auto-renewing” term – such as, say, you must give a minimum of three months notice before the end of the first 12 months period to end the contract. Otherwise it renews for a further 12 months.-

Argue you are in fact a consumer

“Consumers” have considerable protection under the Consumer Rights Act. The Court may regard as unfair, taking into account all the circumstances of the contract. A term which has the effect of: –

…automatically extending a contract of fixed duration where the Consumer does not indicate otherwise, when the deadline fixed for the Consumer to express his desire not to extend the contract is unreasonably early.

In the Regulations, a “Consumer” is a natural person who is (in summary) not signing the contract for business purposes.

However, if you can show that you signed the contract partly for personal reasons and/or the benefit of the contract was only incidental regarding your business, you may be able to bring the contract under these Regulations.

So, for example, you might be a “Consumer” if you sign a contract as a business which buys and improves properties, but also use each one to provide a home for your family – i.e. the contract is purportedly with your business but is intended to benefit both you and the business.

Argue Incorporation of Terms

Any term must be incorporated to be enforceable.

Terms and conditions which are immediately visible to a contracting party will form part of the contract, however long and complicated the agreement might be.

There is normally no obligation for Tie-you-in Limited” to draw the automatically renewable  term to your attention.

However, there is a principle that where there is a contractual provision which is particularly unusual or onerous, but not immediately visible, Tie-you-in Limited  would not be able to rely on the clause unless they have done enough to bring the clause fairly to your attention, particularly where a contract may have been signed under pressure of time or other circumstances.

Argue UCTA:

The Unfair Contract Terms Act (generally known as UCTA) limits a company’s ability to avoid to business contracts in respect of terms regarding contractual performance, misrepresentation and restriction of contractual remedies.

UCTA does not normally allow a business to challenge unfair standard terms which relate to its own performance or obligations – which would generally mean that businesses are not protected against a term automatically extending the contract.

However certain respected legal commentators have said that you could bring an auto-renewal clause under UCTA if you could show that it allowed Tieyouin to render a contractual performance substantially different from that which was reasonably expected of it.

I have not seen any case law on this point.

Argue Ambiguity:

If there is any ambiguity at all in Tieyouin’s auto renewal clause, you could argue that the clause should be construed against Tieyouin – known in English law as the “contra proferentem” rule.

Argue Performance:

You should look at the history of Tieyouin’s performance and consider whether there is any defect in this performance which would legitimately allow you to bring the contract to an end.

Argue Misrepresentation:

Can you remember what was said or written at the time the contract was made?

Perhaps Tieyouin’s salesman made promises which it has not lived up to.

Give Notice:

If all else fails, make a diary note to give notice at a convenient time to your company, or if you are not particularly concerned about the business relationship with Tieyouin, if notice has to be given “at least X months prior to …” why not give a written notice straightaway by a recorded delivery letter.

No payment from a regular source of work

By | Problem Solved

The Problem

I am a carpentry sub-contractor, with most of my work coming from one source, a main contractor.  When I take on work for this contractor, it is usually by way of a verbal agreement.

Every Friday they email me a list of work to be carried out the following week, and at the end of that week, I email an invoice for each individual job.  The verbal agreement on payment is 7 days and the contractor makes payment straight into my bank account.  This has been the case for several months.

However, no payment was received from the contractor on 31 March.  When I spoke to them, they said that full payment would be made the following Friday.  This did not happen, and when I chased them up, they stated that one job I had done was unsatisfactory.  I immediately attended to this, only to be subsequently told that the job was still not satisfactory and they had employed someone else to fix the problem.  They have since told me that they will be contra-charging me for the cost, and in the meantime will be withholding all payments due to me until they know what the cost is.  They also stated that as there is no written agreement on payment terms, I cannot class the payment as late.

As they did not notify me that they still had an issue with my work and allowed me the chance to put the supposed issue right, can they then contra charge me?

I have since sent 3 final payment demands, but received no replies.  Nor have I received a pay less notice.  If payment was due on 31st March 2017, can this now be classed as having missed the final date for payment?  Also, has the contractor missed the chance to issue me with a pay less notice?

Name withheld

Michael’s Response

There is a binding contract at the point that you commenced the work (your commencement signifies your acceptance of the main contractor’s offer for you to carry out the work listed in the email), and this is known as contract by conduct.  Although there may be an absence of written terms, there will be implied terms and terms that may be incorporated in each contract by reference to your previous course of dealings with the main contractor, providing there was a reasonable expectation that the term you seek to rely upon would apply, and there are no other contrary terms.

In addition, the Housing Grants, Construction and Regeneration Act 1996 (as amended), will also apply to your contract, which in turn will imply part 2 (payment) of the Scheme for Construction Contracts, and although you may not be entitled to stage payments (for stage payments to apply, the duration of a contract must be estimated not to be less than 45 days), you will be entitled to receive payment by the ‘final date for payment’, although this is a much longer period than the 7 days you have said you agreed with the main contractor (it will be at least 47 days following completion of the work).

Whether or not the contractor has failed to issue you with a timeous pay less notice will depend on whether the previous course of dealings or the Scheme for Construction Contracts applies, although in all probability, in the absence of a pay less notice under either term, the contractor would have missed its chance.

On the contra-charge, the contractor must give you an opportunity to carry out the remedial work.  Whether or not your first attempt to make good is considered as giving you that opportunity will depend on the actual circumstances.  That said, without a timeous pay less notice, the contractor is not permitted to make any deductions from the amount due.

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

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What’s Your Legal Issue?

All Builders Problems Solved articles are a response to real problems experienced in the industry and we invite you to submit details of your own legal issues using the form at the bottom of this page. If your matter is used the advice is free. We do however assume we have your permission to publish the article on our website and on our social media platforms, although the names and details will be amended so that you may not be identified.

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Making a case to extend time

By | Problem Solved

Problem

I work as a contracts manager for a main contractor.  Back in January 2016, we started work on the refurbishment of an office block in Birmingham.  It was nothing too complex, and we were supposed to finish in December 2016.

However, delays were incurred during construction, resulting in the eventual completion being at the end of March 2017 – approximately 13 weeks late.  Most of the delays were down to us (let down by a couple of sub-contractors), although part of the delay was the client’s fault.

At a meeting towards the back end of 2016, I approached the client and stated that we would not make a claim for an extension of time with loss and expense, providing the client would waiver its claim for liquidated damages.  The client seemed quite enthusiastic about this and said it was a good idea.  This arrangement was kept to, until we put in the payment application just before completion of the work.  Although the client’s agent certified most of our application, we then received a letter from the client headed up ‘Pay Less Notice’, which claimed that we were late in completion and therefore had a right to deduct the liquidated damages as per the contract.

Can the client do this?  What can we do?

Kim

Response

Hello Kim.

If you wanted to have made the ‘arrangement’ binding, you should have executed a side agreement, which is an agreement that sits in parallel to the main agreement but effectively moves the goal posts as regards to the terms of completion.  From your outline, I very much doubt you could establish a binding agreement was reached, or there was a legal waiver as to the right to claim damages or, estoppel.

Your client, as the employer under the building contract, was quite within its rights to issue a pay less notice.  Where an employer to a construction contract wishes to set-off sums against a payment that is due to a contractor, it is mandatory for the employer to issue a pay less notice, and providing the pay less notice is a) issued on time; b) specifies both the sum that is considered to be due at the date the notice is given; and c) the basis on which that sum has been calculated, then the pay less notice is valid.

However, it does not mean that the pay less notice cannot be challenged.  For example, if the contract is a JCT, a condition precedent to the deduction of liquidated damages is for a notice of non-completion to have previously been issued.  You could also challenge the liquidated damages as being a penalty if the damages are extremely high when compared to the actual or likely losses.

I would however suggest that the best way forward, would be for you to provide the necessary level of evidence that would establish that you are not responsible for at least part of the delay, and then try and reach a formal agreement where each party is responsible for its own costs.

© Michael P. Gerard

May 2017

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

Was the water proofing firm appointed as a domestic sub-contractor?

By | Problem Solved, Uncategorized

Problem

I am hoping for a bit of understanding around an issue I have.

My building company started a refurbishment contract a few months ago and were appointed under a JCT Minor Works Building Contract.  When carrying out the works, an area of damp was found and I instructed a specialist water proofing firm to go into the property install a vertical DPC and apply Sika render.  I am now writing up a report about the project for the client and am trying to understand the water proofing company’s contractual role.  Am I right in saying that the water proofing company was appointed as a domestic sub-contractor as they were paid and managed by my company?

I understand minor works contracts are not suitable for named specialists but I was wondering whether this was true if the specialist had to be appointed after the contracts were signed.

Hopefully that makes sense and I would greatly appreciate your advice.

Samir, Leicester

Response

Hello Samir. In a nutshell, because you instructed, managed and paid the water proofing company, it would most likely be a domestic sub-contractor.  I say likely, because you may have instructed the sub-contractor on behalf of the employer (providing you had authority and made this known to the sub-contractor at the material time), whilst managing and payment does not necessarily indicate a contractual obligation.

If the sub-contractor had addressed its estimate to your company and you accepted this estimate without reference to a third party (i.e. the employer), then your company would have entered into a legally binding contract with the sub-contractor and thus the sub-contractor would be a domestic sub-contractor.

Under the JCT Minor Works Building Contract, there are no provisions for nominated or named sub-contractors.  Any sub-contractors would either be employed by the principle contractor or directly engaged by the employer.  If the employer wishes to nominate or name a specialist contractor, then there are other contracts in the JCT suite that will accommodate this.

© Michael P. Gerard, April 2017

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

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What’s Your Legal Issue?

All Builders Problems Solved articles are a response to real problems experienced in the industry and we invite you to submit details of your own legal issues using the form below. If your matter is used the advice is free. We do however assume we have your permission to publish the article on our website and on our social media platforms, although the names and details will be amended so that you may not be identified.

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