Cross-Option Agreements – Essential Risk Management

Feb 9, 2021 | Business Law Articles | 0 comments

Death is never a nice thing to think about. It’s why according to YouGov over 61% of adults in Britain still don’t have a will, despite knowing their importance. But if you run a business, then part of your risk planning and management has to include the death of one or more owners as a possibility. And just like any other risk in your business, you need to understand what that means, what the consequences could be, and how you can best handle the situation if it did happen. In this case, the solution is a little document called a cross-option agreement. This blog focusses on owners of limited companies but they can apply equally to partnerships.

What are Cross-Option Agreements?

Ask yourself this. When a shareholder in your business dies, what happens? Who benefits from their estate? And will that person want to take an active role in the business? Would they want to sell those shares back to the company? And is there cash available to pay for them? Or might they be tempted to sell those inherited shares to a rival instead?

All of those things can and have happened to businesses who have suffered the death of a shareholder without a cross-option agreement in place. To put it simply, a cross-option agreement is a legal document that prevents disruption to the business if a shareholder dies, by giving ‘options’ over their shares in the event of their death. Essentially, it states that, in the event of a shareholder’s death:

1. The surviving owners will have the option to require the deceased’s representatives to sell the deceased’s shares in the business to the surviving owners.
2. The representatives of the deceased shareholder will have the option to force the surviving owners to purchase the deceased’s shares in the business.

This keeps the business operations running smoothly, and it gives peace of mind for shareholders’ families, knowing that they will always have a cash buyer for shares if the worst should happen.

Are They Really Necessary?

If you have multiple shareholders, then absolutely. It’s essentially an extension of estate planning, and a way to make sure that if you do die, your shares are dealt with in the way you wish, and in a way that won’t cause stress or disruption to your loved ones, or your business. It also protects the business from a lot of different things, including someone who inherited shares in your business trying to exert control using those shares, or selling them to the highest bidder (or a competitor). A cross-option agreement legally details the process for share transfer in the event of death, and when worded correctly can also prevent other legal issues from being triggered.

Why the Fine Print Really, Really Matters

Now, we usually recommend that businesses get all of their legal documents at least looked at by a legal professional, if not written wholly by them. However, there are actually very few documents that HAVE to be written by a lawyer, and this isn’t one of them. But it’s one of the ones we strongly urge you to seek professional help on, because if you get the wording slightly wrong, you could end up losing some tax reliefs you probably want to keep.

For cross-option agreements, it’s essential that the person writing it understand the legal terminology, so that they don’t fall foul of certain inheritance tax provisions, which could render the transfer of shares ineligible for business property relief, and lead to a bill for the deceased’s estate. The key element to focus on is making sure that the ability for shareholders to buy the deceased’s shares (and the deceased’s representatives to sell them) is drafted as a right, and not an obligation. This might seem like a small thing, but if either party is under a legal obligation to buy or sell those shares, then the transfer is then subject to a binding contract for sale. This means that for inheritance tax purposes, it will be treated as a transfer of cash, and business property relief would be lost.

Funding the purchase

Shareholder Protection (limited companies) and Partnership Protection (partnerships and limited liability partnerships) is a business insurance that pays out a lump sum to the business, providing the financial means to purchase the shares under a cross-option agreement. You can also include critical illness cover that will pay out in the event of the shareholder falling ill. It’s always best to seek professional advice when it comes to business insurance and the team at Covertree Financial Services can help you arrange your shareholder protection policy to support the cross option agreement.

Drafted properly, a cross-option agreement ensures that the deceased’s beneficiaries can extract value from the company their loved one worked for in a tax-efficient way, and in a way that causes minimal disruption to the remaining shareholders. In other words, it keeps everyone happy and makes an otherwise complicated time much simpler for all.

At Clearly Business Law, we are always happy to give information or advice on your cross-option agreements, so if you need some help, please get in touch today.

Do You Need a Prenup for Your Business?

Jan 20, 2021 | Business Law Articles | 0 comments

Yes.

But you probably wanted a more detailed answer than that.

Starting a business with your family or partner can be a wonderful thing, and thousands of very successful corporations started out as family businesses. But along with the advantages of forming a company with someone you are so close to, come some pretty significant disadvantages. Mainly, what happens to the business if the marriage breaks down, and you decide to go your separate ways? Does it keep operating? How does it work? What if one partner wants nothing to do with it any more?

That’s why corporate prenuptial agreements are important.

The Corporate Prenup

Let’s start with the basics. A prenuptial agreement (or prenup) is a written agreement entered into by a couple before marriage, which sets out how assets will be divided and handled if they divorce or if the marriage is dissolved. This is a legal document, and while it is not technically legally binding, if both parties entered into it willingly, understood what they were doing and there were no factors that make entering into the prenup unfair, then it will be upheld by the courts. And if you are both owners or shareholders in a business, then a prenup can also act as protection for your business interests, specifying what should happen in the event of a divorce.

This is something the couple need to have discussed at length before a document is drafted up, and there should also be a ‘backup’ plan in case the situation isn’t as amicable as they had planned. Yes, we know it’s not something anyone likes to think about, but if you’re going to run a successful business, sometimes you’ve got to have difficult conversations. And the reality is that a divorce could very easily put your business at risk. Especially since businesses are no different from any other asset, and they will be taken into consideration in any financial settlement in the event of a divorce. Which is why it’s generally a good idea to have agreed on the best course of action in advance, and have it written down in a prenup.

Reasons Business Owners Might Consider a Prenup

There are a number of reasons a couple that own a business together may want to enter into a prenup. Just a few include:

• To agree calmly, in advance, how business assets would be shared in a divorce (rather than during the emotional time when you’re splitting up).
• To seek total control of your business after the divorce.
• Because you believe it could be a problem to split up the business (this is often the case with family businesses).
• To safeguard or ‘ring-fence’ any inherited property or assets associated with the business, or any that you want to pass on as an inheritance in the future.
• To protect yourself or your spouse from any debts accrued by the business.
• As a record of the business assets, and who owns what.
• To prevent any disruption to the business during the divorce.

Some Points to Consider

A prenup protects both spouses and the business, and acts a bit like lifeboat on a cruise liner – you hope you won’t need it, but you’ll be very grateful it’s there if things go south. A few things to bear in mind when drafting your prenup (and when setting up your business in general) that can provide some protection in the event of divorce. For example:

• The company articles of association and shareholders agreement should be carefully designed to accommodate the individual needs of different shareholders. For example, you may want to prevent a shareholder from transferring ownership of shares to a family member or close friend without prior consent from other shareholders.
• Agree on a method of valuing the shares in the company in advance.
• Create separate classes of shares, each with different rights (non-voting, voting, enhanced, capital rights, limited capital rights etc). Thus allows a level of control and oversight over shares at all times.
• Agree on how shares are allocated, moved, sold and reissued in advance.

If you’re considering going into business with a spouse, or you are engaged to marry your business partner, then we strongly encourage you to put some legal protections in place, just in case.

At Clearly Business Law, we help business owners make the right decisions for their business, and protect their assets with 2020 vision. If you would like to know more about a prenup for your business, or just want to discuss your options, then please just get in touch with us today and book your free consultation.

Buying a Business? It’s not a decision to be taken lightly…

Jan 12, 2021 | Business Law Articles | 0 comments

Buying a business is a risky endeavour, however, it becomes even riskier if you go into the business ‘blind’ without having done thorough due diligence.

Due diligence is perhaps the most essential element to any successful commercial transaction. It is important to not only assess the value of the business, but also confirm any facts the seller has provided, and determine any potential anomalies, risks or unforeseen liabilities.

Buying a business on nothing more than your own evaluation is an accident waiting to happen. As a buyer, it is essential to consider that everything is not always as it seems, which is exactly what one businessman had to learn – the hard way.

The case of Lum v Chan

In the case of Lum v Chan, Mr Lum purchased the trading stock, equipment and other assets of Chan’s catering supplies and equipment company for a total sum of £100,000 in 2014. Lum had high hopes for the business’ future, aiming to expand and work with other businesses overseas. For the sake of carrying out some form of ‘due diligence’, Lum decided to work for Chan’s business in order to gain an understanding of just how it worked.

However, by 2016, Lum’s dreams were dashed when his new business went into liquidation. How? Lum hired Chan, the previous owner, as his new manager, but this business arrangement quickly turned out to be a recipe for disaster. Despite Chan’s duty of fidelity, he was found to be diverting payments to his own private bank account, alongside the account of the previous company. Additionally, Chan was found to be diverting business opportunities, and as a result, Chan was able to revive his previous business.

The absence of conventional due diligence

Lum took Chan to court and was able to recover some damages for losses caused by Chan’s actions but the outcome was far from satisfactory. The court had a difficult task in front of them – Lum relied on his own understanding and belief of the business’ true value and workload, having worked for the previous company but the court had difficulty in assessing the actual value due to the new company’s lack of financial accounts and the inaccurate accounts held by the previous company.

Consequently, the main problem in this case was the absence of any conventional due diligence which made accurate quantification of Lum’s claim extremely difficult. Had Lum insisted on properly reviewing the company’s accounts before he bought the business, he would have been in a better position in understanding the value and therefore calculating any losses.

If you’re considering buying a business

Before buying a business, you should always consider how much you actually know about it. It is important to have an accurate understanding, and this can be done with the right advisors by your side.

At Clearly Business Law, we have helped business owners through this process. If you have plans for buying a business in the future, talk to us. We can help you right from the start to make sure this is the right investment for you.

Contact the team by email info@clearlybusinesslaw.co.uk or call 01980 676875.

Advent Tips – 2020 update

Dec 1, 2020 | Business Law Articles | 2 comments

Last year, just ahead of our rebrand to Clearly Business Law, we shared our Christmas Advent of Legal Top Tips. Each day we shared a piece of advice in the run up to Christmas. We received lots of great feedback about how the tips had prompted you to take action or remind you of things to take a closer look at.

With a growing audience, a growing team and quite a peculiar year shall we say, we’ve refreshed our legal top tips to make sure you’re still getting the right advice.

Advent of Legal Top Tips – the 2020 edition!…

1 – Get it in writing: although oral contracts are binding, it is very difficult to prove what has been agreed if there is a dispute.

2 – Put a date in the diary: if you enter into a lease or contract with key dates for giving notice make a note of the date to avoid missing deadlines.

3 – Spread the word: make sure your business T&Cs are available before orders are placed by customers or clients. Simply putting them on your invoices is too late as the contract has already been formed.

4 – Listen up: when dealing with disputes in your business make sure you listen to the other side’s concerns. It is easier to resolve a dispute early on if you know what the issue is. Communication has been so important this year.

5 – Sorry to let you down!: Covid-19 has changed a lot of things in the business world this year. If a consumer has paid in advance for goods or services that can’t be provided due to Covid-19, they should be offered a full refund

6 – Good grief!: by law if you are an employer you must set out a grievance procedure and share it in writing with all employees. It doesn’t have to be in your contracts of employment but make sure you have one. If this is something you need help with, we highly recommend speaking with the team at VivoHR.

7 – Sharing is caring: if your business is a limited company with 2+ shareholders you should consider a shareholders agreement to avoid disputes between the shareholders and set out procedures for resolving disputes that do arise.

8 – That’s my name!: Consider protecting your business name by applying for a trade mark. A trade mark is a valuable business asset and will ensure nobody else uses your name. We successfully helped our client Premier Touch Cleaning to trade mark their company name – find out about it here

9 – Already protected?: Or so you think! If you have already registered your business’s intellectual property, in light of the UK leaving the EU you will need to apply for separate UK and EU trademarks/designs/patents etc. Confused or unsure – give our team a call.

10 – Prevention is better than cure: if you are going to start working with a new customer/client or supplier make sure you do your homework to find out the exact business entity you are dealing with and consider their financial position. 2020 has increased the importance of this so consider things like taking deposits or having shorter payment terms in place until a payment history is established.

11 – It’s not my fault: when entering into a contract make sure there are provisions to avoid liability for matters outside your control and reasonably limiting liability for those you can control. Understandably, Covid-19 has had a massive impact on everyone’s business not least when it comes to actually delivering services, so make sure you check your force majeure clause to refer to pandemics, lockdowns and shortages in supplies or workforce.

12 – For sale: if you are considering selling your business, start pulling together key information early. Due diligence (where the seller delves into the business to understand what it is buying) is a lengthy process which can be shortened if you have key documents and information to hand.

13 – Can I have your autograph?: contracts can be validly signed electronically provided that there is an intention by the person signing to authenticate the document. This year has advanced the use of technology and many more businesses are considering how electronic signatures could be used to speed up transactions.

14 – Health & Safety: although businesses with fewer than five people are not required to have a written statement, all businesses need to assess potential risks in the workplace. Consider having a written statement in any event to ensure the safety and wellbeing of your team. This is an area which Field Training Services can support with you – find out about Debbie and her team here.

15 – Cash is king: unpaid invoices can cripple a business. It’s important to review your T&Cs to check you have sufficient protection against non-payment e.g. retention of title, interest on late payment or suspending services. This year we did see some temporary legislation come into place to protect tenants who were unable to pay their rent because of the impact of coronavirus. This meant that landlords could not evict them due to non payment of rent.

16 – Happy anniversary: make it a habit to review your business contracts and T&Cs regularly (e.g. perhaps when you renew your insurance) to make sure they are still working for your business.

17 – Dealing with consumers: if you sell goods or services to consumers (people that are not buying from you in the course of their business) they have extra protection you may not expect – make sure you understand your obligations under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013.

18 – Copycat: if an employee creates work for his employer the employer will generally be the owner of copyright in the work. However, if the work is created by a freelancer/independent contractor you will need to specifically make provision to deal with copyright as it is otherwise retained by the freelancer/independent contractor. Don’t get caught out!

19 – Top Secret: when sharing confidential or commercially sensitive information with others consider using a non-disclosure agreement to protect the information being disclosed from being misused or shared.

20 – London, New York, Paris: if you enter into contracts with parties in other countries take extra care in ensuring your legal interests are protected and in particular don’t assume that our law will automatically apply to your contract (or that any disputes will be dealt with by courts in England and Wales). Seek advice at an early stage before the contract is signed.

21 – Insure it: as your business grows make sure you have adequate insurance that grows with you. If you have employees then Employer Liability Insurance is obligatory.

22 – Virtual meetings: Covid-19 has vastly increased the use of remote meetings using appropriate online software applications. Company law in England and Wales does permit directors to hold board meetings remotely. However, it will depend on your company’s articles of association as to whether this is allowed by your company or not.

23 – Brexit: 1 January 2021 is not just New Years Day, it is also the end of the Brexit transition period. Understand how the changes brought by leaving the EU will affect your business.

24 – Sorry!: Not a business law tip but it is Christmas Eve – Why did Santa have to fit booster seats and seat belts on his sleigh? Because of Elf and Safety! Happy Christmas from the team at Clearly Business Law.

That’s it! Once again, we hope that you have found these legal top tips useful and easy to apply to your business. As always, the team are here to help you. To get in touch just call us on or 01980 676875 email info@clearlybusinesslaw.co.uk

Terms and Conditions: The clauses that will catch you out!

Nov 8, 2020 | Business Law Articles | 0 comments

Planning on selling to consumers: here is all you need to know!

As a business, terms and conditions (T&C’s) regulate and form your relationship with your customers. They act as the legally binding agreement between you both concerning the supply of goods and/or services. In order to protect your business and your customers, you need to state the terms of use in a clear, easy and unambiguous manner which is unique and specific to your business. For many business owners, “terms and conditions” pose as a scary image of incomprehensible legal jargon and as a result, they don’t get the attention they require.

If you are a business selling goods and/or services to another business, it is generally up to the parties which clauses they wish to include in their terms and conditions and any related contract between them.

However, if you are a business selling goods and/or services to a consumer then the Consumer Rights Act 2015 (the Act) tells us that certain terms or clauses must be included in your terms and conditions. As a business (the Act refers to a business as the ‘trader’), you have certain legal responsibilities when selling goods and/or services to a consumer, as opposed to other businesses. This is because the law does not consider a business/trader and a consumer to be on an equal footing, and therefore, seeks to offer consumers additional protection. This is something very important for your business to consider.

Who is a trader and consumer?

Under the Act, you are considered to be a trader if you are a ‘person acting for purposes relating to your trade, business, craft or profession’.

A consumer, however, is considered to be a ‘natural person’. This means that they are an individual whose dealings with your business are wholly or mainly outside the purposes of their business, commercial or trade activity. For example, a company cannot be a consumer.

What clauses must be included in your terms and conditions?

Goods

The Consumer Rights Act requires that the goods you sell must be:

• of a satisfactory quality,
• fit for purpose and
• match the description given

Additional requirements set out by the CRA include:

• A consumer’s right to cancel – The consumer has the right to cancel an order from the moment it is placed and ends 14 days from the day they receive their goods. They then have an additional 14 days to send the goods back.
• A consumer’s right to a refund – You should issue a refund within 14 days of the goods being returned to you or if evidence has been provided of having returned the goods (for example, a proof of postage receipt from the post office), whichever is the sooner.

Services

• A contract to supply a service does not bind the consumer where it excludes the trader’s liability to perform the service with reasonable care and skill
• The consumer has the right to cancel a service 14 days after entering into the contract. The service requested should not be provided before this 14-day period has ended.
• In some instances, the consumer may request the service start within this period. If this is the case, the consumer will still maintain their right to cancel however, they will incur a charge for the service that has provided up until the point of cancellation.
• If the service requested is provided in full within the 14-day period then the consumer’s right to cancel may be lost.

Most Importantly…

As a business providing services and/or goods to consumers, you cannot include the following:

• Unfair contract terms – A contract term will be assessed for fairness if it is not prominent and transparent. Therefore, if your business hopes to rely on the terms you have with consumers it is crucial that those terms are ‘fair’. Simply, unfair contract terms – whether you’re aware of the law or not – are not legally binding or enforceable and you could be prevented from using them.
• Any term which excludes your business’ liability to provide the service with reasonable care and skill. (services only)
• Any term which excludes or restricts liability for death of personal injury resulting from negligence. This term will be simply be unenforceable.
• Any term that excludes the consumers right to rely on anything that is said (verbally or in writing) to the consumer, by or on behalf of the trader about the service provided if it is taken into account by the consumer when deciding to enter the contract or when making any decision about the service after entering the contract.

Don’t forget the basics…

• Business details (i.e. trading name, address, contact information)
• Definition of goods and/or services being sold
• Payment terms – total price, when payment is due, and what should happen in the event of a late payment, non-payment or incorrect payment
• Additional charges i.e. delivery.
• Warranty or guarantee policies.
• Responsibilities for both parties
• Limitation on liability – specifies the extent to which your business will be obligated to provide damages to a customer if you should happen to fail to perform as agreed
• Term – how long the contract will last for
• Termination – if and how either party can terminate the contract
• A statement covering your intellectual property
• Data protection
• Force Majeure – what happens if there is an event outside the reasonable control of the parties which prevent one party or both performing their obligations.
• Governing Law and Jurisdiction – which legal system will govern the contract – particularly important if you trade with consumers outside England and Wales.

This is something that the team at Clearly Business Law can help you with. Let’s talk – email info@clearlybusinesslaw.co.uk or call 01980 676875.

Protecting Your Bright Ideas: What is Intellectual Property Law?

Nov 18, 2020 | Business Law Articles | 0 comments

In this exceedingly competitive world, Intellectual Property and its protection in law is pivotal for any business.

Intellectual Property is a broad term which refers to ‘creations of the mind’. The law allows for creativity to be rewarded by giving creators the protection and recognition for their ideas, concepts and inventions.

The protection of these ideas can be divided into two categories; registered and unregistered.

Registered rights

Each registered right is granted by an official (usually Government) body, such as the Intellectual Property Office after an application has been sought. Registered rights are also “monopoly rights” – this means that the owner has exclusive control and can prevent others from using the right without their permission. In terms of registered rights, these come in the form of trademarks, patents and registered design rights.

Trademarks are signs capable of distinguishing goods and services from one business from another. Trademarks can also be referred to as a ‘badge of origin’ and can be anything that identifies your brand, such as the name, word, or logo. In essence, it is the thing that conveys the brand’s characteristics and allows customers to find and remember you. Each trademark lasts for a duration of ten years and, in reality, a company will have multiple trademarks

Patents, whilst expensive, provide the exclusive right to protect a product’s technical function. In order to be successfully granted, the invention:

• must be new (never been in the public domain)
• involve an inventive step (meaning that is ‘not obvious’ to ‘a person skilled in the art’) and
• be capable of industrial application.

Once granted, this type of protection lasts for a period of 20 years. Patent rights are also territorial, which means that UK patent holders will only maintain this right within the UK.

Registered design rights allow for the appearance of a product, such as the shape, appearance, configuration and decoration to be protected. Registration of your design means that others are prevented from using or copying the design for a duration of 25 years.

Unregistered rights

Unregistered rights arise automatically when certain requirements are met. These types of rights, which include copyright and unregistered design rights

are typically more difficult to enforce. As a result, it is preferable to register your rights.

Copyright protection currently arises in original literary, dramatic, musical and artistic works, as well as, sound recordings, broadcasts, films, where the necessary requirements are met. It allows the owner to protect against others reproducing or copying their work.

Protecting your assets

Each business is packed full of ideas, concepts and products, and therefore, IP can often be a business’ most valued asset. So, if you are launching a business it is essential you consider your Intellectual Property rights sooner rather than later.

This is something that the team at Clearly Business Law can help you with. Let’s talk – email info@clearlybusinesslaw.co.uk or call 01980 676875.

Brexit: Understanding what happens next for your business

Oct 23, 2020 | Business Law Articles | 0 comments

The UK is currently in its transition period until 31st December 2020. During this time, businesses have had to keep complying with EU rules and laws. However, as the transition period comes to an end, it is time to get your business prepared.

At present, trade between the UK and the EU is entirely tariff-free. However, it is likely that British businesses will face additional administration and EU tariffs. In terms of exporting and importing goods, your business will encounter a new process and will need to consider the following: consumer declarations, an EORI number (should start with GB) as well as tax rates and duties which apply.

As a consequence of these additional trade and tariff requirements, your business’ supply chain (flow of goods/services) may be disrupted. It will be essential for your business to anticipate that it may be harder to fulfil your customer’s orders and prices may increase and we recommend reviewing your terms and conditions accordingly.

Free trade across the EU is not the only major transition that will impact your business as the free movement of employees is also set to change. Both EU citizens working in the UK (who will need to apply to remain) and UK citizens working abroad face additional requirements for work, travel and residence. In order to hire from the EU, a new points-based system will be in place which will introduce job, salary and language requirements. In addition, your business will need to register as a licensed sponsor in order to hire these eligible employees from outside the UK.

If your business plans on placing manufactured goods on the market from January 2021 there will be new regulations that you will need to comply with. Whilst manufacturers’ legal obligations will largely remain the same, your company will need to confirm whether you or your supplier will become an ‘importer’. You will also need to ensure that your goods meet the correct conformity markings. If your goods are currently subject to the EC marking, this will need to be replaced with the UKCA mark to indicate that the products comply with UK legislation. Any EU based representatives/responsible persons will also no longer be recognised in the UK. If required, your business will need to an appoint a UK based representative or responsible person.

Furthermore, if your business has intellectual property this is another important factor to take into consideration. Your business will still want to protect brand names and designs, but the existing coverage is set to change. Therefore, as a right holder, your business will need to apply for separate UK and EU trademarks/designs/patents etc.

Behind the scenes, the government and parliament will be untangling the web of legal and regulatory uncertainty. Therefore, one of the most important and immediate adjustments that your business will need to be prepared for, is the change in the approach to the law. As the UK is likely to bring into force their own regulations which will replace the EU’s, a period of uncertainty will most likely follow.

As the UK is yet to strike a deal, nothing can be said for certain. For many this next period is simply about understanding the changes that business will be exposed to in the coming months. But it is important for businesses to understand what happens next, particularly if you import goods to or export goods from the EU.

If you need any help get in touch with us on info@clearlybusinesslaw.co.uk or 01980 676875.

Premier Touch Cleaning Ltd

Oct 12, 2020 | Case Studies

Intro

Premier Touch Cleaning Ltd is a cleaning company based in Fleet, Hampshire covering approximately a 10-mile radius. We specialise in Domestic, Commercial, End of Tenancy, New Builds & Disinfection fogging. We are a team of 22 cleaners all of whom are DBS checked.

Challenges

Before using Louise at Clearly Business Law I was considering the opportunity to have my business name trademarked. I investigated the process and whether completing this myself was a suitable option, however I soon understood the length of the process and the detail required, and decided to work with Louise and have her represent me on my behalf.

Solutions

Clearly Business Law has been amazing in dealing with this for me, from the application side and correspondence too. Unfortunately, our first application was declined. Louise was able to advise on what to do next and was confident in representing me at a hearing to see if we could have the application successfully accepted.

Results

I can highly recommend Louise at Clearly Business Law; my trademark wasn’t a straightforward application. I was kept up to date throughout the process, regarding any correspondence and hearing dates. I would not have been able to do this myself and I am glad I chose Louise to represent me. We now have the trademark!

Personal Quote

Louise at Clearly Business Law has been fabulous! The communication, updates and advice on how to proceed with the application has been amazing! Louise is very professional, and I have no hesitation in using her again or recommending her.

Jo Fenn,
Director, Premier Touch Cleaning Ltd

Premier Touch Cleaning Ltd

Refunds

Sep 30, 2020 | Business Law Articles | 0 comments

Refunds: When Can a Business Refuse a Refund in The Face of Covid?

Covid-19 has changed a lot of things in the world of business, and one area many of us have become much more conscious of is finance. Money is tight for a lot of us, and it can be difficult to keep up with any financial aid available, what best practice and guidance is at any one time, and what your business is allowed to do. During these uncertain times, the last thing you want to be doing is giving money away.

In recent weeks, the Competition and Markets Authority (or CMA) have issued more guidance around this issue, aimed at consumer-facing businesses receiving requests for refunds and cancellations during the pandemic. But what does it all mean, and can a business refuse to give a customer a refund? We explore the latest guidance from the CMA in our latest post.

Refunds

Full Refunds:

The CMA’s first piece of guidance is very clear – If a customer has paid in advance for goods or services that can’t be provided, they should be offered a full refund where a contract can’t go ahead as agreed due to Covid-19 lockdown laws. This includes:

• Where a business cancels without providing any of the agreed goods or services.
• Where a customer can’t receive the agreed goods or services. This could be because, for example, local lockdown laws have made it illegal to actually receive those goods or services (like facial beauty treatments, or overseas travel isolation rules).
• When the goods or services provided are dramatically different from what was originally agreed with the customer.

Of course, that doesn’t mean that every customer is automatically entitled to a full refund. For example, if their own actions have meant they can’t receive the services, then there is no immediate expectation for a full refund. After all, why should a business bear the financial burden for a customer’s choices? Where a refund is applicable, the CMA acknowledges that there may be an understandable delay, but that businesses should still issue refunds as promptly as possible.

Refunding Ongoing Contracts:

Ongoing contracts are much more complicated than one-off purchases, and the law far less clear. The CMA’s guidance states that:

• Consumers should normally receive a full or partial refund for paid-for services not provided or unable to be used due to lockdown laws;
• Consumers can normally withhold paying for services not provided or which cannot be used due to lockdown laws; and
• Businesses can require a small costs contribution until the service provision is resumed, provided that the contract terms clearly and fairly set this out and consumers can freely terminate if they do not wish to pay the contribution.

Obviously this guidance isn’t as cut and dried as it seems, and there will be exceptions. The key is to assess each case individually and ensure the customer and business are both treated fairly.

Non-Refundable Payments & Fees:

The CMA has made it clear that the above rules on refunds apply regardless of whether a particular payment is labelled as non-refundable, or an advance payment for goods and services. They reason is that the contract containing any terms permitting the business to keep a customer’s money while providing no service will be unfair, and so in direct violation of the Consumer Rights Act 2015. The CMA have also added that businesses should not charge any kind of administration fee (or equivalent) for processing refunds – for the same reasons as above.

Seeking Payment for Future Services:

At this time, the advice is that businesses ‘must not seek advance payments for any goods or services that they know they can’t provide’. This is generally good business practice, but for Covid-19 specifically, it might apply if local lockdown is already impacting your ability to provide goods and services, and those restrictions are likely to remain in effect.

Cancellations

Cancellations Under Government Guidance:

This is a very complex area, and unfortunately is where a lot of the confusion happens. But the guidance says that generally, outside of specific rules (like those for foreign travel) businesses may be within their rights to treat cancellations by customers due to non-binding government guidance as cancellation by choice. This puts the refund outside most of the guidance already discussed above – but you will need to look at each one on a case-by-case basis.

Cancellations Under Standard T&Cs:

If you as a business don’t provide the goods or services promised, then the customer is entitled to their money back. So the CMA’s view is that if the business decides to cancel without providing any goods or services, then they cannot keep the customer’s money. Equally, businesses shouldn’t impose any disproportionately high charges for customers who cancel their contracts during these troubled times.

But as with all things, there are exceptions. For example, if the goods or services are personalised and cannot be sold or supplied anywhere else, and the business has incurred a cost to create them, then the business might be fully entitled to refuse a refund. Particularly when the T&Cs have been brought to the customer’s attention at payment, but the customer later cancels of their own volition.

There are a few options open to businesses to avoid this, including:

• A deposit retention where the deposit is a small percentage of the total price;
• Advance payments for future services should usually be refunded, but can be subject to deductions limited to costs that businesses reasonably incur;
• Cancellation charges should be limited to a genuine estimate of what a business will lose directly; and/or
• Businesses should not be compensated twice for the same loss (e.g. by retaining some advance payments and imposing a cancellation charge).

Of course, all of this is very, very complicated, and no one can really predict what’s going to happen next. Not the most useful stance to take, but in a pandemic, the only thing we can be certain of is uncertainty. This guidance can be a useful starting point for businesses to follow and if you aren’t sure about what you should do just get in touch with the team at Clearly Business Law today.

If you need any help get in touch with us on info@clearlybusinesslaw.co.uk or 01980 676875.

Termination Clauses

Sep 30, 2020 | Business Law Articles | 0 comments

Is it time to review your termination clause in your supply contracts?

We previously wrote a blog on the Corporate Insolvency & Governance Bill.

The Corporate Insolvency & Governance Act 2020 (“Act”) came into force on 26 June 2020 and applies to all existing and new contracts from that date. The Act introduced a number of temporary measures in response to the Covid-19 crisis, as well as new permanent reforms of the UK insolvency regime. We have been monitoring the guidance to ensure we keep clients up to date as developments unfold.

One of the new permanent measures introduced by The Act provides for the protection of supplies of goods and services and may affect termination clauses in your terms and conditions and your contracts with customers and suppliers.

In simple terms the key changes mean that a supplier will no longer be able to rely on clauses in a contract which allow for the supplier to terminate a supply contract for the reason:-

1. that the customer has entered into an insolvency or formal restructuring procedure; and
2. of a past breach of contract (i.e. non-payment of invoices) once the customer has entered into an insolvency or formal restructuring procedure.

In practical terms these changes mean that (subject to certain exclusions), suppliers will have no choice but to continue to supply to a customer under their supply contracts once the customer enters into an insolvency or restructuring procedure, even where there are pre-insolvency arrears. They will also be prevented from making the payment of such arrears a condition of continued supply.

Many of our clients at Clearly Business Law may fall into the ‘Small Suppliers’ exemption. This is a temporary exemption in response to Covid-19. The exemption initially applied between the Act coming into force and 30 September 2020. This has just been extended until 30 March 2021.

What steps can my company take to protect itself?

• Keep an eye on the financial circumstances of your customers, i.e. regularly monitor their credit rating;
• If it looks like your customer will enter into a formal insolvency or restructuring procedure take swift action to terminate the contract if possible and allowed under the contract.
• If your customer has entered into an insolvency or restructuring procedure you may be able to apply to the court to terminate the contract on the basis of your own undue financial hardship.

How can Clearly Business Law help you?

We can review your terms and conditions to ensure they are as up to date in the current climate and offer you as much protection as possible.

You may wish to consider including the following in your terms and conditions:

• An obligation for your customer to notify you of any change in their financial circumstances.
• An option for you to terminate the supply contract before a formal insolvency or restructuring takes place. For example, an option to terminate if there is an intention by your customer to appoint administrators or if they become balance sheet insolvent.
• Earlier and shorter payment terms.
• A parent company or director guarantee.

If you need any help get in touch with us on info@clearlybusinesslaw.co.uk or 01980 676875.