Legal news roundup - November 2018


Date: 14 November 2018

Legal news roundup - November 2018This month's legal news round-up includes a great summary of the recent gay marriage cake ruling, a timely reminder of employers' responsibilities at office parties and a divorcing husband trying to get his hands on his wife's inheritance before her parent has even died.

Also clarification on when agency workers are temporary and therefore protected by agency worker rules and a great new Companies House tool aimed at those setting up a flat management company.

Business refusing order because customer wanted slogan on product the owners disagreed with is not discrimination

A Northern Irish bakery cancelled a gay customer's order for a cake decorated with an image and words supporting gay marriage, saying it was against their genuine and deeply held religious beliefs that marriage can only be between a man and a woman. The customer was a member of a voluntary group set up to increase visibility of the lesbian, gay and bisexual and transgendered community in a positive manner. The cake decoration was to include the name of the organisation, and the slogan 'Support Gay Marriage'. The cake was for an event to celebrate progress in a highly public political campaign to introduce same-sex marriage in Northern Ireland. The customer claimed direct discrimination on grounds of his sexual orientation and religious and/or political beliefs.

The bakery said it did not discriminate against the customer on grounds of either his sexual orientation or his political beliefs, but because the requested message on the cake was contrary to its owners' religious beliefs. It said it would have cancelled an identical order from a straight customer, irrespective of their political beliefs. The bakery said it did not know at the time that the customer was gay, or what his political beliefs were.

The Northern Irish Court of Appeal ruled earlier that there had been 'associative discrimination'. It said the reason that the customer had been treated less favourably was because the slogan on the cake related to gay and bisexual people - it was those groups whose political beliefs included a belief in gay marriage. Refusing the order therefore discriminated against the customer because he was associated with people of a particular sexual orientation and particular political belief.

The Supreme Court has overruled that ruling. It said that the bakery did not refuse to provide goods and services to the customer because of his sexual orientation when it refused to supply a wedding cake with the slogan 'support gay marriage' on it. Nor did it (or the owners) discriminate on the grounds of religious or political belief, and there had been no associative discrimination because there had not been a sufficient association between the customer and particular persons with those protected characteristics.

It also relied on human rights laws which protect people from being forced to express a political opinion they do not believe in.

The Supreme Court ruled, therefore, that the bakery had not been directly discriminatory on grounds of either sexual orientation or political belief.

Businesses should think carefully before refusing customer orders if it is arguable that the refusal is because of a protected characteristic of the customer, or that there has been associative discrimination - but otherwise they are free to refuse the order.

Case ref: Lee v Ashers Baking and Ors No. [2018] UKSC 49

Serious injury at drinking session following works party was employer's responsibility

A director seriously injured a manager in an incident which took place after a group had gone to a hotel room to carry on drinking (at their own after-party) after their works Christmas party had ended. At the after-party, a row developed over the director's decisions about a new employee. The director summoned staff and gave them a lengthy lecture about his authority in the company. When the manager continued to question the director's decisions, the director punched him - causing him to suffer brain damage.

The manager sued the company (and its insurers) on grounds that the employer was vicariously liable for the director's actions. To succeed, he had to show that the director was acting in the course or scope of his employment.

The High Court earlier ruled that the employer was not vicariously liable because the incident took place during a private after-party drinking session, not at the works party itself.

The Court of Appeal disagreed, ruling that the director was acting in the course or scope of his employment at the after-party. Given that:

  • the director was the owner, directing mind and most senior employee in the company
  • he had acted as such when he summoned and lectured his staff
  • the after-party followed on from an organised works event which most staff had gone to, and
  • the company had paid for taxis and drinks to the after-party

there was a sufficient connection between the director's job and his conduct, and the employer was therefore vicariously liable for the consequences of his actions.

Employers should ensure they take responsibility for their employees' safety and wellbeing after work-related social events have ended, as well as during them, or risk being vicariously liable for post-event injuries.

Case ref: Bellman v Northampton Recruitment Ltd [2018] EWCA Civ 2214

Employers should be wary of continuing disciplinary hearings when employee does not attend

An employee of 21 years' standing sent an email to a customer referring to one of her own colleagues as a "knob" and "knobhead". When her employer found out, it suspended her and invited her to an investigatory meeting. The meeting recommended that there should be a disciplinary hearing.

The employee said she wanted a trade union rep to accompany her at the hearing, but there was a delay of several weeks because she was ill and on annual leave. A date was fixed, but it transpired that the union rep was unavailable for several weeks.

There are rules saying that if a disciplinary hearing has to be adjourned because an employee's union rep is not available, the employee can suggest a fresh date that is not more than five working days later. If that date is reasonable, the employer has to schedule the hearing for that date.

The employee had not suggested a date during the five days after the proposed date, so the employer decided to press on with the hearing anyway. The employee refused to attend without the rep. In her absence, the employer summarily dismissed her for gross misconduct. Her appeal failed and she claimed unfair dismissal.

The Employment Tribunal found that the employer's insistence on pressing on with the hearing without either the employee or the union rep meant the procedure was unfair. The dismissal was therefore unfair.

However, sometimes it was reasonable to continue in that way, for example, where there was bad faith on the employee's part, or non-attendance was a deliberate attempt to inconvenience the employer - but that had not been the case here. Generally, employers should take all reasonable steps to ensure employees were present at disciplinary hearings so they could present their side of events.

The Employment Appeal Tribunal (EAT) agreed. It said employers had a duty to act reasonably, and the employer had failed to discharge this duty when it refused to allow a short delay to the hearing. This overall duty to act fairly overrode any procedural or technical rules in this respect, such as the five-day rule. The EAT went on to provide a useful checklist of issues relevant to whether or not an employer could reasonably adjourn a disciplinary hearing:

  • The seriousness of the alleged act
  • The employee's length of service
  • Whether the disciplinary process has been unnecessarily drawn out
  • The reason for the request to delay/postpone
  • Whether the delay is reasonable
  • Whether a reasonable employer would refuse the request
  • Whether dismissal is a possible/likely outcome

Employers should resist pressing on with disciplinary hearings when the employee (or their union rep) does not attend if it could be unreasonable to do so, otherwise they risk an unfair dismissal claim.

Case ref: Talon Engineering Limited v Smith UKEAT/0236/17/BA

New law: Businesses should review how they protect trade secrets following new law

Businesses will welcome new EU laws harmonising trade secret laws in all member states. These are aimed at stopping employees and others from acquiring or using their trade secrets without permission, or disclosing them to anyone else.

To a large extent, the new laws mirror existing UK law, but many businesses are using them as a reason to review and improve the measures they already take to protect their trade secrets.

The new law defines trade secrets as information which:

  • Has a commercial value because it is secret
  • Is not generally known or readily accessible to those in the circles that normally deal with that kind of information, and
  • Is information that the business has taken reasonable steps to keep secret

There are obvious examples of trade secrets, such as the Coca Cola formula, and the ingredients in the Kentucky Fried Chicken coating. However, trade secrets can also include information about matters such as your manufacturing processes or marketing campaigns; the way you price your goods or services; the results of market research; and how you pitch for work. Trade secrets are often summarised as information that could cause real or significant damage to your business if your competitors knew it.

Employees owe their employer a general legal duty of confidentiality. While some employers rely on their employees complying with this duty to prevent unauthorised use or disclosure of trade secrets to third parties, further steps are strongly recommended, such as:

  • Identifying all trade secrets in the business (which may even flush out some trade secrets the business did not realise it had), giving someone responsibility for protecting them, and developing a formal, written confidentiality policy
  • Restricting access to your trade secrets to authorised personnel, eg. by password-protecting and/or encrypting confidential information on your IT systems, and keeping hard copy information secure (in a locked room, filing cabinet or safe)
  • Recording authorised personnel, their level of access and, where appropriate, a record of when and/or why they access confidential information
  • Including how to identify and protect trade secrets and confidential information through employee induction and training
  • Including obligations and penalties in employees' contracts of employment and staff handbooks
  • Marking information as confidential (whether stored online or offline) so anyone gaining access to it, even inadvertently, can clearly see it is confidential

Third parties learn confidential information about a business while dealing with it, for example, as an IT or marketing contractor, supplier or business partner. Businesses should, therefore, expressly agree not to use or disclose trade secrets or other confidential information they discover through their work by signing confidentiality agreements; or include appropriate clauses in contracts of engagement, supply contracts, joint venture agreements, and so on, with them.

Where the relationship is as a business partner or joint venture, it may be necessary to agree who should own new trade secrets and confidential information created during the collaboration.

Confidential information, including trade secrets, can sometimes be registrable at the UK or European intellectual property registry, for example, as a design or an invention. While this gives significant protection, there are downsides. For instance, to protect an invention by registering a patent, a business has to make the invention public. Given the importance of trade secrets to many businesses, it is good practice to take professional advice.

Recent tribunal clarifies when agency workers are 'temporary' so protected by agency worker rules

A security guard was employed on a zero hours contract for a period of 21 months. His employer, a temporary work agency, provided guards for clients 'as and when needed'. Throughout his employment, the guard was mainly sent to one particular site for one particular client.

The issue was whether he was only placed with the client temporarily. If he was, then the Agency Workers' Regulations applied to him, and he would be entitled to the same (or no less favourable) basic employment and working conditions as the client's employees, provided they complete a qualifying period of 12 weeks in the particular job.

The approach taken by the Tribunals is that work is temporary if it is not permanent. Permanent work usually means work under a contract which is open-ended, ie. it has no fixed expiry date and only terminates if proper notice of termination is given.

The Employment Appeal Tribunal ruled that the guard's work involved a series of separate assignments to the client, each for a fixed period. His work was therefore temporary rather than permanent or indefinite. He provided specific cover for the client as and when required (because the client's own security guards were absent), and was therefore working temporarily each time, for the fixed duration of the absence being covered. Therefore, the Regulations applied to him.

The ruling makes clear that the fact he was working on a zero hours contract did not, of itself, mean he must be working temporarily. It was quite possible for such a contract to apply indefinitely, so it would then be permanent rather than temporary for these purposes.

Agency businesses should make clear whether their agency workers are provided to clients on a temporary basis or permanently/indefinitely, as their entitlement to employment rights and conditions can depend on this

Case ref: Brooknight Guarding Ltd v Matei [2018] UKEAT 0309_17_2604

Directors can be personally liable if they wind up company to avoid paying debts

A contractor agreed to carry out renovation work on a house for a client company. The company was owned by two brothers, one of whom had been appointed as a director of the company. The second brother was held by the court to be a de facto director because he was funding the company and controlling its finances.

A de facto director is someone who has not been formally appointed as a director, but behaves as if they were a director such that certain company and insolvency law applies to them as if they had been formally appointed as a director.

The second brother was funding the company but got into financial difficulty, leaving the company underfunded. Two years into the renovation agreement, the company owed the contractor around £444,000. However, the second brother was able to raise sufficient funds to carry on the work, but rather than put it into the original company and pay the contractor what he was owed, he put it into another company he owned and was sole director of - then engaged a different contractor to finish the work.

The original company terminated the contract with the contractor and was put into liquidation by the brothers. The contractor was owed £1,082,000.

Unusually, the contractor brought various claims including that the brothers had induced the first company to breach its contract with the contractor, and that there had been a conspiracy to injure the contractor by unlawful means.

On the inducement claim, the High Court drew a distinction between acts which were an 'inducement' to a breach of contract, and acts which were 'mere prevention' of the performance of a contract. It ruled that the brother's failure to fund the original company was not inducement, but the active decision to do the following was inducement:

  • Divert the fresh funding away from the original company to another one
  • Put the original company into liquidation, in order to benefit from the work already done by the contractor without paying for it, and
  • Then complete the work through another company, using another contractor

The Court therefore ruled that the second brother had induced the first company to breach the contract (so if the brothers had simply walked away from the whole renovation, without completing it, it may not have amounted to inducement).

The Court also found that the brothers had colluded to put the original company into liquidation to avoid having to pay the contractor for the work already done, which meant they were also guilty of conspiracy to injure by unlawful means.

Directors of a company in financial difficulties should take professional advice if they plan to wind up the company to avoid paying its debts (or any other scheme with that aim in mind), otherwise they risk being personally liable for inducing a breach of contract and conspiracy.

Case ref: Palmer Birch v Lloyd [2018] EWHC 2316

Court rejects husband's argument that wife's expectation of significant future inheritance was a 'resource' of hers on divorce

The wife in divorce proceedings had an extremely wealthy father. Due to 'forced heirship' laws in her family's country, there was a clear prospect she would inherit a great deal of money from him when he died. The husband argued that this was a 'resource' of hers, and which should be taken into account when the court was deciding on the appropriate financial settlement between them.

The Court of Appeal rejected this argument. It said that she would not necessarily receive her inheritance for many years, and there was no legal duty on the father under English law to give her anything before then, so it would not be right to make her reliant on him to do so.

In any event, that "sat uncomfortably with contemporary mores", as it would significantly restrict her independence.

A divorcing spouse should not assume that the other spouse's prospects of inheriting significant wealth, even if virtually certain, will be taken into account when agreeing a financial settlement on divorce

Case re: Hayat Alireza v Hossam Radwan [2017] EWCA Civ1545

Bad leaver clauses allowed recovery of money from ex-shareholder who secretly planned to compete

Three shareholders entered into a shareholders' agreement containing 'bad leaver' provisions. These, as well as the articles of association, said that if any of them committed a 'material breach' of the agreement, the others could acquire their shares at a 50% discount. Among other things, the provisions also required the parties to promote the company's success, keep accurate accounting records, and to act in good faith towards the company and the other shareholders.

Following declining sales and a failed sale of the company, relations between the shareholders soured. One of them had secretly been preparing to leave in order to set up a rival business. Without knowing about this, the other two formed a company to buy his shares from him for £1.2m.

Days after the sale of their shares, the leaver set up a new company which started competing with the old company. It wrongly used confidential information, diverted sales away from the old company, and diverted funds into the new company's bank account.

The remaining shareholders claimed that the secret plans the leaver had made while at the old company were in breach of his three obligations (referred to above); were in breach of his duties as a director; and would, had they known about it, have justified summarily dismissing him. Therefore, the bad leaver provisions in the shareholders' agreement were triggered, with the power to acquire his shares at a 50% discount. The leaver should therefore pay back part of the money they had paid for his shares through the company set up for the purpose.

The High Court agreed. It ruled that had the shares been acquired under the bad leaver provisions, the other shareholders would have paid £650k for them. It therefore ordered the leaver to pay back the excess from what he had been paid.

Companies should consider including bad leaver provisions in their articles and/or a shareholders' agreement, so that they can recover sums already paid to a bad leaver for their shares if the leaver is later found to have acted in breach of the agreement and/or their director's responsibilities.

Case ref: Keystone Healthcare Ltd & Anor v Parr & Ors [2018] EWHC 1509

New guidance: Companies House launches online tool for flat management companies

Companies House has launched a free online learning tool for those setting up and/or running flat management companies.

Management companies for flats are commonly set up to own the freehold of a building containing flats, with the flat owners being the company's members. The owners of the flats therefore own their landlord, and can make sure the property is managed properly, service charges are reasonable, and leases are extended if required.

Go to the online tool on the GOV.UK website

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