ABG Commercial Newsletter – June 2013

Deposit payments and breach of contract

Where property or a substantial asset is being sold, very often the contract provides for the buyer to pay a proportion of the purchase price on exchange or prior to completion. The payment can be classified either as a deposit or as part payment of the purchase price. The difference is important because if the buyer fails to complete the contract, the seller can forfeit a deposit but not a part payment. The buyer can claim a refund of an advance payment, although the buyer must still pay damages to the seller for any loss suffered as a result of the buyer’s breach.

What happens if the buyer fails to pay the deposit by the time specified in the contract? This was the situation in a recent case involving the sale of a ship. The contract provided for the buyer to pay a 10% deposit within 3 days of the contract being signed. The buyer failed to pay the deposit and so the seller terminated the contract because of the buyer’s breach of contract.

The buyer argued that, although the seller would have been entitled to retain the deposit had it already been paid, it could not claim payment of the deposit following termination of the contract, but was limited to claiming damages (which would have been substantially less than the amount of the deposit). However, the Court rejected this argument and ruled that the seller was entitled to claim payment of the deposit from the buyer. It was clear from the contract terms that the deposit was intended to be security for the buyer’s performance and the right to payment of the deposit had already accrued before the contract was terminated by the seller. It was said that the buyer could not be in a better position by failing to pay the deposit than it would have been in had the deposit already been paid.

This case shows that the terms of a contract should make it clear whether an initial payment is intended to be a deposit or only a part payment of the purchase price. Also that a seller should ensure that the obligation to pay the deposit arises as soon as possible so that it can be forfeited if the buyer defaults.

Carrying out works “with due diligence”

In a recent case the Court confirmed that a developer was in breach of its contractual obligation to carry out works with due diligence when it stopped work on a project for over a year.

The developer suspended work on the project because the recession had rendered it unviable. It said that continuing the work would have been commercial suicide. Claims for damages were then brought by the prospective tenants of the development who alleged that the developer was in breach of the agreement for lease which contained two separate clauses which, firstly, required the developer to carry out the works diligently and, secondly, to use all reasonable endeavours to ensure that the works were completed as soon as reasonably practicable.

The Court confirmed that the obligation to carry out the works diligently carried with it notions of “assiduity/expedition” and that the developer had two separate obligations. Even if stopping work was not a breach of the second obligation to ensure the works were completed as soon as reasonably practicable, it was still a breach of the due diligence obligation.

The developer’s argument that continuing the project would have been commercial suicide was rejected as providing a defence to the claims.

Changes in defamation law

A number of changes to the law on defamation are due to be introduced by the Defamation Act 2013, including some changes which affect defamation claims relating to defamatory material published on the internet.

One general change is that in future a statement must have caused or be likely to cause serious harm to the claimant’s reputation for it to be defamatory. This is intended to prevent trivial claims being brought. Where the statement relates to a business, it will be necessary to show that the statement has caused or is likely to cause the business serious financial loss in order for it to meet the serious harm requirement.

It will continue to be a defence to show that the statement complained of is substantially true. In place of the current defence of fair comment, there will be a new defence of honest opinion which will apply where the statement is an expression of opinion rather than an assertion of fact. For this defence to apply the statement must indicate the basis of the opinion and also must be one that an honest person could have held on the basis of an existing fact.

There will also be a new defence of publication on a matter of public interest which will apply where someone publishes material which they reasonably believe is in the public interest.

In the case of material published on the internet, there will be a degree of protection for website operators where a statement on the website is posted by someone other than the website operator. A number of conditions will have to be satisfied for the defence to apply, including a requirement that the claimant must be able to identify the person who posted the statement on the website. If the claimant is unable to identify the person who posted the statement so as to be able to bring proceedings against him or her, it will still be possible for a claim to be brought against the website operator.

Finally, a Court will have a new power to order a website operator to remove a statement which has been ruled to be defamatory.

Corporate governance code for small and mid-size quoted companies

The Quoted Companies Alliance has published an updated corporate governance code for small and mid-size quoted companies. The new code replaces the 2010 guidelines for smaller quoted companies and sets a standard of minimum best practice for small and mid-size quoted companies. The code asks companies adopting it to report on a “comply or explain” basis.

The new code sets out 12 broad principles for good corporate governance which place greater emphasis on the delivery of growth in long term shareholder value. The code also prescribes certain minimum disclosures which should form part of a company’s annual report or appear on its website to demonstrate good corporate governance in accordance with the 12 principles.

In addition the code includes a greater consideration of the characteristics of an effective board, in which the central role of the chairman receives particular emphasis. The Quoted Companies Alliance considers that an effective board should work as a team led by the chairman who should demonstrate his responsibility for corporate governance, should develop and clearly articulate the strategy of the company, evaluate its performance and act on the conclusions, regularly inform and engage with shareholders and should have a balance of skills, experience and independence.

Personal liability for company’s contract

Sometimes it can be difficult, but also of crucial importance, to identify precisely who is a party to a contract. This is highlighted by a recent case in which the Court of Appeal ruled that an individual who was the sole owner and director of a limited company was a personal party to the contract purportedly entered into by the company because he had signed a contractual letter bearing the company’s trading name but without any indication that it was a limited company.

The individual owned a limited company called Chad Furniture Store Ltd. The company traded under the name “Moon Furniture”. Engineering consultants were engaged when a new showroom was to be built for the business. The consultants were told that the individual owned the Moon Furniture business and a letter was issued to them under the heading Moon Furniture with an address relating to Moon Furniture. The owner of the business signed the letter without any indication that he was signing on behalf of Chad Furniture Store Ltd.

The owner was dissatisfied with the work of the consultants and brought a claim against them in the name of the name of the limited company. However, the defendants claimed that the contract was with him personally rather than with the limited company and that he had suffered no loss or damages as he was not the owner of the property on which the development took place.

This defence was upheld by both the High Court and the Court of Appeal. Both Courts said that the owner had entered into the contract personally and the fact that Moon Furniture was the trading name of the limited company did not affect this. The engineering consultants had no knowledge at all of any link between Moon Furniture and the limited company.

This decision shows how important it is to ensure that the correct contracting party is clearly identified and named in all documentation.

 

The comments in this note are of a general nature only. Full advice should be sought on any specific problems.

Tim Sisson
tsisson@abg-law.com
+44 (0)115 934 3333

Andrew Sutton
asutton@abg-law.com
+44 (0)115 934 3303