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Archive for the ‘SME-Small Medium Sized Enterprises’ Category

Commercial Contracts – Try to Keep It Simple

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In many legal jurisdictions there is an overriding duty of good faith between contracting parties. However, the English Courts have consistently refused to adopt such a vague and subjective concept: there is no implied duty of good faith between contracting parties. The starting point is that each is free to take advantage of the other unless, for instance, there is a fiduciary duty.

Rupert Wright

Rupert Wright

The general rule when drafting contracts is to keep it simple if possible and conventional. Over- elaborate deal structures are fraught with difficulty. It is important to agree the main elements of the contract before drafting a written contract and to involve lawyers at an early stage.

Lawyers should also be managed and should be discouraged from agreeing the points in too fine a detail since commercial decisions are best left to the client not the lawyer. It is also important to plan ahead and allow time and space to negotiate the final contract.

As regards fiduciary duty in commercial contracts, an exception seems to exist for ‘relational contracts’ which can exist where the parties have a long term relationship and in such a situation, good faith, co-operation and loyalty are more likely to be implied.

This is probably easiest to prove in an employment context where the Supreme Court has recently confirmed that employers should be subject to a more objective stand of reasonableness when making decisions that affect their workers. In essence, employers must avoid capriciousness, perversity or irrationality. As was stated recently in the Supreme Court, the existence of an employment relationship may justify a more intense scrutiny of the employer’s decision-making process than would be appropriate in some commercial contracts.

This approach can be implied into more straightforward commercial contracts. A recent High Court decision has caused some comment by deciding that a commercial contract involved a ‘relational contract’ and that there was therefore an implied term to act with integrity and honesty although that seems to be a narrower concept than good faith.

The case involved a contract between a Police Authority and a vehicle recovery company and the important factor was the number of transactions between the parties and the length of their contractual relationship which led the Judge to describe it as a relational contract par excellence.   This High Court decision has raised concerns in the legal community because it does potentially open up a wider duty of care where there is a long established relationship between the contracting parties even if integrity and honesty is not as wide as good faith. This could well lead to judgements by the English Courts towards a more generalised duty of good faith between contracting parties.

For further information contact Rupert Wright on 01635 521212 or rupert.wright@clmlaw.co.uk

 

Written by Rupert Wright

August 14th, 2015 at 11:01 am

Tips for Small Businesses Sales

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Rupert Wright

Rupert Wright

Small businesses are generally defined as family businesses or businesses which are owned and managed by a single individual or by a small group of people. Rupert Wright, corporate services lawyer with Charles Lucas & Marshall, provides some pointers for buyers and sellers.

Due Diligence.  The small business may not have the time or resources to do a detailed due diligence exercise into the business it is buying.  In practice, an accountant often needs to be involved to check accounting issues.  However, the due diligence process includes checking supply contracts, the existence of litigation or disputes and employee issues.

Tax issues.  Stamp Duty and VAT will need to be checked.  In particular, VAT is not charged on assets sold as part of the transfer of a going concern.  However, both the seller and the buyer must be registered for VAT purposes.

Stock and work-in-progress.  Both parties must agree the value of the stock.  The simplest course of action is for the parties to agree on an expert valuer to carry out the stock valuation.  The most usual formula is for the valuation to be at the lower of cost and net realisable value.

Business Contracts.  The parties need to consider what action needs to be taken to transfer business contracts to the buyer.  To the extent that the buyer wants to have the benefit of a contract, this can be assigned to him by the seller.  The ideal solution for the seller is to seek to have contracts novated.

Computer Contracts.  Most small businesses are dependent on computers for their day to day operation.  Computer hardware is frequently leased rather than acquired outright.  Software can also pose contractual issues which need to be dealt with.  Also, the transfer of the rights in a website to the buyer need to be considered.

Restrictive covenants.  The buyer normally needs to have a restrictive covenant to prevent the seller opening a competing business or poaching valuable customers or staff.  The timescales for such restrictive covenants would need to be considered and generally two years is a sensible time period.

Employee rights.  The rights of employees are governed by the TUPE rules which provide that Contracts of Employment of employees are automatically transferred to the buyer.

Warranties and Vendor protection.  The buyer should seek reasonable warranties from the seller.  Sellers should ensure that they have protection from potential claims, particularly as to the amount that can be claimed.  Also, buyers should seek specific indemnities on key matters.

In summary, it is essential for both sellers and buyers of small businesses to involve a specialist business lawyer to assist with the asset purchase agreement required.

For further information contact Rupert Wright on 01635 521212 or rupert.wright@clmlaw.co.uk

Written by Rupert Wright

February 24th, 2015 at 6:23 pm