EM Law Contract Lawyers London

You want to sign a contract before your company is incorporated? Think again!

This blog explains the problems with pre-incorporation contracts and sets out what you can do if you find yourself in this situation.

What is incorporation?

A company does not legally exist until it is incorporated. Incorporation is the process by which a new or existing business registers as a company. Once a company is incorporated, it will receive a certificate of incorporation confirming its existence and showing the company number and date of formation. Before a company is incorporated, it cannot enter into commercial contracts. Consequently, nobody can sign a contract for that company as an agent. A contract entered into by a party on behalf of a company, where that company has not yet been formed, is called a pre-incorporation contract.

The law

The
general rule relating to pre-incorporation contracts is set out in section 51
of the Companies Act 2006. The section states that:

“A contract that purports to be made by or on
behalf of a company at a time when the company has not been formed has effect,
subject to any agreement to the contrary, as one made with the person
purporting to act for the company or as agent for it, and he is personally
liable on the contract accordingly.”

This means
that anyone who signs a contract on behalf of a company before that company is
incorporated will be liable as if they were the contracting party. Section 51
also has dual effect, as confirmed in the case of Braymist Ltd v Wise Finance.
As well as having personal liability, the person who signs on behalf of a
company can personally enforce the pre-incorporation contract.

What exactly is an "agreement to the contrary"?

There has
been some disagreement over the years as to the exact meaning of “agreement to
the contrary”. Thankfully, case law has provided some clarity. If you can prove
that there is an “agreement to the contrary” you may be able to negate
liability and get yourself off the hook.

In
Phonogram v Lane, Lord Denning took the phrase “subject to any agreement to the
contrary” to mean that for a person to avoid personal liability the contract would
have to expressly provide for his exclusion.  

In Royal
Mail Estates Ltd v Maples Teesdale, Mr Johnathan Klein took a similar but even
more restrictive approach. Mr Johnathan Klein stated that an “agreement to the
contrary” would only exist if it could be established that, by relevant words
properly construed, the parties intended that the contract would not take
effect as one made with that person. In other words, there was only a contrary
agreement if there was found to be an agreement between the parties by which
they intended to exclude the effect of section 36C(1), which is now section 51
Companies Act 2006.

In the
case the defendant firm of solicitors signed the contract “for and on behalf of
the buyer”. The contract related to the sale and purchase of a property in
London and included a clause which stated that the benefit of the contract was
personal to the buyer. As both parties were unaware that the company in
question had not in fact been incorporated Mr Klein concluded that the contract
was not drafted with section 36C(1) in mind. The terms in question were clearly
intended for a different purpose, which was to prevent or restrict a third
party from becoming a buyer by way of an assignment of sub-sale.

The fact that
the defendants here were a firm of solicitors shows just how easy it is to be
caught out by section 51. Proving that there was “an agreement to the contrary”
is a high hurdle to overcome.

What can I do to avoid liability?

As the
saying goes, prevention is better than cure. As the risk sits with the person
who has signed the contract, it is extremely important for that person to carry
out appropriate checks to confirm that the company in question has been
properly incorporated, and continues its corporate existence, before a contract
is concluded. If you have already signed a pre-incorporation contract on behalf
of a company, and you cannot prove an “agreement to the contrary”, you may
still be able to avoid personal liability as explained below.

  • Novation

A novation
is a three-way agreement that extinguishes one contract and replaces it with
another, in which a third party takes up the rights and obligations of one of
the original parties. In this scenario, the third party taking up those rights
and obligations would be the company. All parties to the original contract, as
well as the company, must consent to a novation for it to be valid. In
addition, consideration must be provided. The various promises between the
parties to the novation are generally regarded as adequate consideration
however some parties may prefer to novate under a deed just to be sure.

  • Ratification

Ratification
is a process by which a party can give retrospective authority to someone who
has entered into an agreement on their behalf. Although some commentators
suggest that ratification may be of assistance in these circumstances, we do
not consider that ratification is possible in the case of pre-incorporation
contracts. There are a number of conditions that must be met for an action to
be capable of being ratified. One of these conditions is that the principal
(here, the company) must be in existence at the time of the contract. As a
company is not legally in existence before it is incorporated, these conditions
will not be satisfied.

Final words

This blog should serve as a timely reminder of the risks of signing documents on behalf of a company; and in particular where a company itself is not in existence. If you have any questions about pre-incorporation contracts or contractual issues more generally please contact Neil Williamson or Joanna McKenzie or you can find out more about our legal services by clicking here.


Signing a contract document

Settlement Agreement Lawyers - Help for Employees

Our settlement agreement lawyers are experts in advising employees and employers on settlement agreements. Our settlement agreement lawyers are Helen Monson, Rhodri Thomas and Imogen Finnegan who are experts in employment law matters.

If your employment is coming to an end, it can be an uncertain and confusing time. Figures from the World Economic Forum suggest that 7.1 million white-collar jobs could be made redundant by 2020. If this happens to you, your employer may offer you a settlement agreement. This blog explains what a settlement agreement is and gives you practical tips on how to manage one.

Settlement Agreement Lawyers - The basics of the contract

Formerly known as a compromise agreement, a settlement agreement is a legally binding contract made between an employer and an employee used to resolve an issue in the workplace. Most commonly used in the case of redundancy or when an employee’s employment is being terminated, settlement agreements lawyers are often tasked to draw up a contract to provide an alternative to the employer and employee going to the employment tribunal.

In most settlement agreements an employee will formally agree not to pursue certain claims against their employer in return for a termination payment of some description. The settlement agreement will contain a clear breakdown of the payments which have been agreed and will also state whether any of them are to be made to the employee free of tax. Usually, the first £30,000 of compensation will be tax-free. Once a valid settlement agreement has been signed, an employee will be unable to make an employment tribunal claim about any of the claims listed in the agreement. It is recommended that settlement agreement lawyers draw up the contract because if the agreement is unclear or misses certain clauses the agreement reached between the employer and employee can unravel.

Settlement Agreement Lawyers: Practical tips

Know how much you’re entitled to (roughly!)

If you’ve received a financial offer, you need to know whether or not it’s fair. If you have a strong potential claim against your employer, then you are more likely to get a higher termination payment. If you do not, then there is not much incentive for your employer to pay you a large sum. You should consider what potential claims you could bring, how likely it is that those claims would succeed, and how much you would be likely to recover if they did. The length of time that you have been working for your employer may also be taken into consideration. Our settlement agreement lawyers can advise you on what you are entitled to.

Don’t be scared to negotiate

Before entering into settlement discussions with your employer, you should take some time to work out what you want to achieve and how you’re going to do it. Think about what’s most important to you and similarly, what you can do without. It may be helpful to think outside the box when negotiating a settlement agreement and consider whether there are any non-financial terms that you would like to include. A good, agreed reference is often part of a settlement agreement. Our settlement agreement lawyers are experts at negotiating settlement agreements.

Try and reach a deal

Remember, settlement agreements are voluntary. You do not have to enter a settlement agreement and you should be given a reasonable amount of time to consider the proposal. According to the ACAS code of practice, you should get a minimum of 10 calendar days to consider a settlement agreement, unless you and your employer have agreed otherwise. There are, however, several advantages to reaching a settlement agreement, particularly if the alternative is going to the employment tribunal. A settlement agreement provides certainty, is confidential, and can be concluded within only a couple of days. In contrast, bringing a claim to the employment tribunal may take months, be costly, and you may not come out with the deal that you were expecting.

Get independent legal advice

Settlement agreements can often be long, complicated documents. Our settlement agreement lawyers can help you consider whether you’re getting a good deal and whether you have any grounds for a claim against your employer. Settlement agreement lawyers can also help with the negotiation process. Getting independent legal advice is also a statutory requirement. An employee must receive advice on the terms and effect of a proposed settlement agreement, as well as its effect on the employee’s ability to pursue their statutory rights. If you do not, your settlement agreement will not be valid.

Settlement Agreement Lawyers: The legal bits

The exact contents of settlement agreements are largely down to the parties and will vary depending on what each party wants. Usually a settlement agreement will set out the arrangements on termination, details of the settlement payment, and provisions on confidentiality. If you breach a confidentiality clause by speaking out about the agreement and/or its terms, your employer will have the right to bring a breach of contract claim against you and you may have to pay them damages.

For a settlement agreement to be valid, it must also comply with six statutory requirements. These are:

• The agreement must be in writing.

• The agreement must relate to a particular complaint or to particular proceedings.

• The employee must get legal advice from settlement agreement lawyers on the terms and effect of the agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.

• The settlement agreement lawyers must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.

• The agreement must identify the settlement agreement lawyers.

• The agreement must state that the above conditions have been satisfied.

The most common claims that employers will seek to protect themselves from are claims of discrimination, unfair dismissal, wrongful dismissal, breach of contract and harassment. An employer will want to waive as many claims as it can, but there are some claims which cannot be waived. These include certain statutory employment rights claims, claims in relation to accrued pension rights, and claims for personal injury that might be caused in the future.

Whether you’re an employer or an employee, it is in your best interests to ensure that you have a well negotiated and well drafted settlement agreement. If you have any questions about settlement agreements please contact our settlement agreement lawyers Rhodri ThomasHelen Monson or Imogen Finnegan.


Selective Distribution Agreements

Selective distribution agreements – a quick guide

This blog offers a quick guide on selective distribution agreements and what you should look out for when considering one. Our lead lawyer for selective distribution agreements is Neil Williamson. Please get in touch if you have any questions.

What is a distribution agreement?

A distribution agreement is a legal agreement between a supplier and a distributor of goods. There are various types of distribution agreement including exclusive distributorship, sole distributorship, non-exclusive distributorship and selective distributorship.

What is a selective distribution agreement?

A selective distribution agreement allows suppliers to appoint particular distributors according to their specific needs. The suppliers agree to supply only to approved distributors who meet specified minimum criteria and the distributors agree only to supply end users or other distributors or dealers within the approved network. These minimum specific criteria are often set out in a schedule at the end of the agreement. Such criteria may include having suitable premises, having adequate training of sales personnel and providing sufficient after-sales services.

Is selective distribution appropriate for my business?

There is no definitive list of products for which selective distribution has been found to be necessary. Past decisions of the Commission and the European Courts have however indicated that selective distribution is likely to be justified in the case of luxury goods such as perfumes and cosmetics, technically complex products such as photographic equipment, and products that combine the two such as high-quality watches.

Selective distribution is therefore not appropriate for all businesses. If the characteristics of the product do not require selective distribution or do not require certain minimum criteria, such a system would not be efficient. EU competition law also comes into play here. If a selective distribution agreement is found to prevent, restrict or distort competition within the internal market, the businesses involved may be liable to pay large fines. Individuals involved may even find themselves facing director disqualification or criminal sanctions for the most serious breaches.

How do I know if my selective distribution agreement is in breach of EU competition law?

Under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU), an agreement will be in breach of EU competition law if it prevents, restricts or distorts competition within the internal market. However, it is generally accepted that selective distribution agreements will not be caught by this restriction provided that three conditions are met. These conditions are set out in the case of Metro I. Firstly, selective distribution must be necessary for the products in question. Secondly, distributors must be chosen on the basis of objective, qualitative criteria. And thirdly, the conditions must be laid down uniformly and applied in a non-discriminatory manner. If these conditions are satisfied then Article 101(1) probably won’t apply and your agreement will not be in breach of EU competition law. If you think that your agreement is, or may still be, caught under Article 101(1) then the next step is to consider whether your agreement qualifies for an individual exemption under Article 101(3).

Individual exemption

Under Article 101(3) of the TFEU, a selective distribution agreement caught by Article 101(1) may still be valid and legally enforceable if it satisfies the individual exemption criteria. The criteria are as follows:
• The agreement improves the production or distribution of goods or services or promotes technical or economic progress;
• The agreement allows consumers a fair share of the resulting benefit;
• The agreement does not impose any restraints on competition other than those absolutely necessary to attain the above objectives; and
• The agreement does not substantially eliminate competition.

If you can satisfy all four criteria then your agreement will qualify for an individual exemption and will not be in breach of EU competition law. If your agreement does not satisfy all four criteria then all is not lost. Your agreement may still be caught by something called the “vertical agreements block exemption.”

Vertical agreements block exemption

For the purposes of EU competition law, a selective distribution agreement is a “vertical agreement”. A “vertical agreement” is an agreement entered into by two or more parties which operate at different levels of the production or distribution chain, relating to the conditions under which the parties may purchase, sell or resell certain goods or services. The “vertical agreements block exemption” (VABE) creates a general presumption of legality for “vertical agreements”, provided that the supplier’s market share is below 30% and that the agreements do not contain specific hardcore restrictions. Hardcore restrictions include:

Price-Fixing

A supplier cannot impose fixed or minimum prices at which distributors must resell the goods that have been supplied. Providing a list of recommended selling prices or imposing maximum selling prices may be acceptable provided that they do not amount to a fixed or minimum selling price as a result of pressure from or incentives offered by the supplier.

Certain territorial/customer sales restrictions

A supplier cannot apply any direct or indirect restrictions on the territories to which, or customers to whom, the distributor may sell the contract goods or services.

Cross supplying between distributors

A supplier cannot restrict authorised distributors from selling or purchasing the supplied goods to or from other authorised distributors in the network. This means that appointed distributors cannot be forced to purchase the goods exclusively from the supplier.

Excluded restrictions

When assessing whether your selective distribution agreement falls under the VABE you also need to look out for certain “excluded restrictions”. If your agreement contains certain “excluded restrictions”, the VABE will not apply to that specific restriction. However, the rest of the agreement may still benefit from the VABE exclusion if the above conditions are satisfied and the “excluded restriction” is severed from the agreement. Hardcore restrictions cannot be severed from an agreement in this way. The “excluded restrictions” are:

Buyer non-compete obligations if these extend beyond five years

A supplier cannot directly or indirectly restrict the distributor from manufacturing, purchasing or reselling any goods or services that compete with the supplied goods or services. A supplier also cannot insist that the distributor purchases more than 80% of their total purchases of that product from them.

Post-termination buyer non-compete obligations

A supplier cannot directly or indirectly restrict the distributor, after termination of the agreement, from manufacturing, purchasing or selling competing goods or services unless the obligation is limited to a maximum period of one year, it is necessary for the protection of know-how and the obligation is limited to the same point of sale from which the distributor has operated during the agreement.

Restrictions on sales of particular competing products

A supplier cannot directly or indirectly restrict an authorised distributor in a selective distribution network from selling the brands of particular competing suppliers.

Agreements of minor importance

Some selective distribution agreements may also be able to benefit from the Commission’s 2014 Notice on agreements of minor importance. The De Minimis Notice states that the Commission will not normally initiate proceedings against agreements between Small to Medium Enterprises. The Notice also states that larger companies should not face investigation where their market shares in the relevant markets do not exceed 15% for agreements between non-competitors and 10% for agreements between competitors. Where competition is restricted by the cumulative effect of the agreements, this threshold is lowered to 5%. An agreement can only benefit from the De Minimis Notice if it does not have as its object the prevention, restriction or distortion of competition. Agreements containing one or more of the hardcore restrictions are also unlikely to benefit from an individual exemption or the De Minimis Notice.

Online sales

If you’ve been keeping up-to-date with EU competition law then you’ve probably heard of the Coty case. In 2017 the Court of Justice of the European Union confirmed that luxury brands may restrict distributors in a selective distribution network from selling their goods through third-party online platforms such as Amazon and eBay, if:
• Distributors are chosen on the basis of objective, qualitative criteria;
• The criteria are applied uniformly and in a non-discriminatory fashion;
• The criteria do not go beyond what is necessary; and
• The restriction in proportionate in the light of preserving the luxury image of the goods.

In 2018 the commission expressly indicated that the Coty principles applied irrespective of the product category concerned and were equally applicable to non-luxury products.

This principle, however, should be followed with caution. In 2018 the Competition Appeal Tribunal confirmed the decision of the Competition and Markets Authority (CMA) against Ping Europe Limited. The CMA found that Ping, a manufacturer of golf clubs, had infringed competition law by entering into agreements with two UK retailers with clauses prohibiting them from selling the Ping golf clubs online. The CMA found that Ping’s commercial aim of promoting in-store custom fitting could have been achieved through less restrictive means. This landmark case sends an important signal that attempts by manufacturers to impose absolute bans on selling their products online are not permitted by law.

Final words

Selective distribution is an exciting and ever- developing system in the distribution and marketing world. Before entering into a selective distribution agreement you should carry out extensive research and consider your options carefully. If you have any questions concerning selective distribution agreements please contact Neil Williamson.