Monthly Archives: July 2013

You may count the cost of failing to be clear on settlement monies

The most important aspect of a settlement agreement which provides for the payment of a sum of money, is that the parties involved are clear on the amount which is to be paid over.

This lack of clarity was at the heart of the recently reported decision in the High Court* involving a Mr Barden and the CRU Group.

Mr Barden had been an employee of the Group.  He left his employment in 2008 and entered into a severance agreement.  Afterwards, a dispute arose as to the terms of his leaving.  The dispute centred on his entitlement to a long-term incentive payment when the CRU Group was sold.

Mr Barden brought a claim which went to mediation.

Ashby Cohen offer advice on ensuring settlement monies are clearly stated in a settlement agreementAt the end of the mediation, a settlement agreement was entered into in the early hours of the morning.  The crucial clause in the settlement agreement was headed “PAYMENT OF AGREED SUM” and provided for CRU to pay £1.35 million (the Settlement Sum) by a specified date.

CRU maintained that income tax should be deducted from the payment to be made to Mr Barden and Mr Barden maintained that the £1.35 million should be paid to him gross.  In the event, CRU paid £676,822.84 direct to Mr Barden and £673,177.16 to HMRC in respect of Mr Barden’s tax liability.

It was common ground that the income tax payable was a liability of Mr Barden and that CRU was required to make the deduction and to pay the relevant income tax on his behalf.

Mr Barden’s point was that he only agreed to settle his claim for £1.35 million because the settlement agreement provided that that was the sum he would receive – he certainly did not agree to settle his claim against CRU for a payment of £676,822.84;  he had it in mind that he would be able to claim a tax credit for the amount of tax paid by CRU to HMRC so that the Settlement Sum would be worth that much more to him.

The Judge had little difficulty in construing the agreement against Mr Barden, describing the meaning of the payment clause advanced by Mr Barden as a commercial absurdity.

The Judge first referred to it being well known that an employer pays income tax by way of PAYE on behalf of an employee so that when an employment contract provides that an employee’s salary is £x per month, no employee expects the gross sum of £x to be paid every month, but expects to be paid £x less the income tax due which is to be paid to HMRC by the employer on the employee’s behalf.

The Judge went on to point out that under Mr Barden’s construction, CRU would be required to pay an additional £1.35 million on Mr Barden’s behalf (because under Revenue rules the £1.35 million would have to be treated as being a net payment and grossed up at a marginal tax rate of 50%), without any such liability being mentioned in the settlement agreement; also, the settlement agreement itself defined the £1.35 million as the Settlement Sum clearly indicating that this was the sum in exchange for which Mr Barden agreed to settle his claims.

The Judge went on to record that if he had construed the payment clause as Mr Barden contended for, he would, in the light of the mediation negotiations (the court had made a consent order disclosure of the notes of the mediation) have ruled that the settlement agreement should have been rectified for common mistake and so would have arrived at the same result that way.

The obvious lesson to be drawn from the case is that the tax treatment of monies to be paid over should always be spelled out in the settlement agreement.

Perhaps another conclusion to be drawn is that if a mediation reaches fruition in the small hours of the morning when, as the Judge stated “the parties have been sufficiently worn down by the day’s combat finally to show their hands”, they should break off and agree to sign a formal agreement recording the agreed terms the following day (although the parties often come to the mediation with a pre-prepared agreement with the payment clauses left blank).

*Michael Kieran Barden –v- Commodities Research Unit International (Holdings) Limited and Others [2013] EWHC1633 [Ch]

Have faith in good faith and fair dealing

A case heard last year in the High Court, involving the court considering the question of good faith in English law, has some relevance in the context of agents and principals.Discussion of how the question good faith affects commercial agents

The *case was brought by a Singapore company against an English company.  The parties had entered into a distributorship agreement whereby the English company granted the Singapore company exclusive rights in specified territories to distribute fragrances which bore the brand name “Manchester United”.

The relationship between the parties broke down and the Singapore company terminated the distributorship agreement.

It claimed damages against the English company for alleged breaches which were said to have consisted in late shipment of orders, failing or refusing to supply the fragrances, undercutting the prices within the territory (the rights granted were for the most part limited to duty free sales) which it had agreed with the Singapore company and providing false information.

One of the arguments by the Singapore company was that it was an implied term of the agreement that the parties would deal with each other in good faith.

It would surprise most people that English law – unlike the law of many other countries – has no legal principle that, when making and carrying out contracts, parties should act in good faith.

Although the Court did not accept that the stage had been reached under English law where a duty of good faith was implied into all commercial contracts, it did hold that it was implied in the circumstances of this case.

One of the circumstances which influenced the Court was that it was dealing with what is called a “relational” contract involving a high degree of communication and co-operation.  The Court gave joint venture agreements, franchise agreements and long-term distributorship agreements as examples of such relational contracts.

An agency agreement was not one of the examples given by the Court.  However, it would seem to be a “relational” contract involving a long-term relationship and requiring a high degree of communication and co-operation.

In cases where the 1993 Commercial Agents (Council Directive) Regulations apply, Regulation 3 specifically states that “in performing his activities, a commercial agent must look after the interests of his principal and act dutifully and in good faith” and Regulation 4 expressly states that “in his relations with his commercial agent a principal must act dutifully and in good faith”.

Thus there is no need to get involved over arguments whether a duty of good faith is implied into an agency agreement covered by the Regulations – the Regulations impose that duty on both the principal and the agent.

What does good faith mean?  Unsurprisingly the meaning is fact sensitive, but the Court pointed out that the test of good faith is objective.  In other words, it does not depend on either party’s perception that what the other has done or has proposed is “improper”.

The test is whether “in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people”.   Consistent with this, the Court thought that the duty could usefully be described as a duty of good faith “and fair dealing” which additional wording had the advantage of drawing attention to the fact that the standard was objective.

Agency agreements often contain an express provision in them that the principal can change the territory.  How does this express right in the contract to change the territory sit with the duty of good faith incorporated into the relationship by the 1993 Regulations?

In order for good faith to triumph, the agent would have to persuade the Court on the balance of probabilities that the principal had an ulterior purpose; of course there may well be good commercial reasons from the principal’s point of view as to why it would want to change the territory.

The answer would no doubt turn on the specific findings which the Court makes in relation to the facts of an individual case.

Thus if an agent could show that the principal had attempted to use its contractual rights to engineer a situation which it believed the agent would find intolerable in order, say, to replace the agent with direct employees, the agent would be justified in terminating the agency because of the breach of the duty of good faith.

It would then be open for the agent to pursue the principal for compensation (or an indemnity).

*Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC III

Compensation on retirement for a commercial agent

Discussion on whether compensation should be given to commercial agents on retirementThere comes a time in everyone’s working life when their thoughts turn to retirement and how they might prepare for those golden years.

In the case of a Commercial Agent, matters can be somewhat more complicated than for others, particularly if seeking compensation.

The Commercial Agents (Council Directive) Regulations, introduced in 1993, includes the concept of a commercial agent being compensated (either by way of compensation or an indemnity) when the agency ends.

The entitlement does not apply where “the commercial agent has himself terminated the agency contract, unless such termination is justified … on grounds of the age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activity”.

This is the wording in the Regulations which enables the agent to claim compensation on retirement. – although the word “retirement” is not mentioned.  So far as the writer is aware, there has not been any binding court case which has ruled on the question as to whether an agent is entitled to compensation on retirement.

The only reported case is a county court decision called Abbott -v- Condici Limited and another, given in 2004.

Mr Abbott was in business as an agent for some 43 years until he retired aged just over 65 in December 2000.  He was the agent of Condici for some 18 years and for the second defendant, Rinku, for some five years (Rinku being the “and another” referred to in the title of the case).

Mr Abbott accepted that he was fit and well and could have continued physically to carry on his agency.  His case was that, on their correct construction, the Regulations protect a commercial agent’s right to compensation when the reason for his termination of the agency is that he wishes to retire at an age generally recognised in the UK as appropriate for him to stop working.

Condici’s case was that reaching a specified age cannot by itself mean that the agent is entitled to compensation when he retires.  Rather, it was argued, compensation is only met if, in consequence of the commercial agent’s age, he cannot reasonably be required to continue his activity as a commercial agent; and whether reaching any particular age means that he cannot reasonably be required to continue his activities depends upon the circumstances of each case.

In other words, Mr Abbott was saying that having passed the recognised retirement age of 65, he could not reasonably be required to continue with the agency and Condici was saying that it was not enough to reach an age (whatever that age is), but that there must also be circumstances so that the agent cannot reasonably be required to continue with the agency.

The County Court judge found that the age of 65 was “embedded as a retirement milestone” and that having reached that age, Mr Abbott could not reasonably be required to continue his activities.  Thus on the preliminary point, the court decided that Mr Abbott was entitled to be paid compensation upon his retirement.

The case is only a county court decision and is not binding.  Although the position is by no means clear (see below),  it would probably be prudent for a principal to assume that, after the agent had reached an age when he became entitled to a state pension, the agent could retire and claim compensation (notwithstanding that he was fit and able to carry on).

Mr Abbott’s case was decided before the compulsory retirement age was abolished so that it would not be as easy nowadays for a judge to base a finding simply on the agent having reached 65.

There has, of course, never been a compulsory retirement age for somebody who is self-employed.  In practice, people retire much earlier or much later than 65 and they may have special circumstances where it is reasonable for an agent to retire at a given point e.g. to look after a partner / dependent who has become ill.

Condici’s argument that it was not enough to reach an age (whatever that age is) but that there must also be circumstances so that the agent cannot reasonably be required to continue with the agency, might still be available to a principal.