corporate clips

clearing the legal minefield: avoiding liability in a growing business

June 2006

Earmarking funding for legal compliance audits may not be at the forefront of any business plan or the most desired use of capital, but it should not be overlooked. In this article, we will show how shrewd investment in key areas of the business can help companies avoid costly pitfalls, reduce the on-going risk of liability and reap long term benefits.

Conducting Business

Although successive Governments each propound the flexible and dynamic nature of commerce within the UK, every aspect of commercial trade - whether dealing with consumers or other organisations - is highly regulated.

Below are examples of how the legal framework in the UK permeates key areas of business activity:

Advertising: Regulations govern every aspect of advertising, from how products are labelled and marketed to whether information could mislead consumers. The laws of trade libel, trade mark and economic interference can also be relevant in comparative advertising.
Distance Selling and Marketing Whether conducting sales via an e-commerce website or concluding contracts by telephone or email, legislation specifies the information which must be given to the buyer at various stages throughout the sale process. This includes informing them of a right of withdrawal.
Product Liability A key area in manufacturing, the law imposes liability for defective products on producers and manufacturers. Putting systems in place to ensure compliance can be a headache, as fault is not a necessary element of liability.
Data Protection and the Freedom of Information Legislation governs not just the collection and holding of personal data, but also the use of traffic data, cookies, location-based data and the security of communications. The rules relating to electronic direct marketing also prevent the use of automated calling systems and unsolicited faxes and emails without prior consent.

Standardising a company's contracting process can aid compliance, cut down on the expense of negotiation and allow contracts to be handled and concluded by more junior staff. It is also an opportunity to impose favourable terms and manage the risk of liability.

However, this should not be considered without having in place a formalised process governing how standard terms are used. There is a danger of employees using standard terms for transactions for which they are not appropriate or making what they believe to be minor changes which affect the enforceability of the provisions. Standard terms also require regular review as the business develops.

Corporate Governance

The basic principles of a good corporate governance system are accountability, responsibility, fairness and openness in the conduct of a company's business. Following the Enron and WorldCom scandals and the Sarbanes-Oxley legislation in the US, corporate governance and the role of the officers of a company has been very much in the spotlight. This has led to a number of Government proposals emphasising managerial responsibility, most notably the Company Law Reform Bill, which (amongst other things) looks to place the duties and obligations of directors on a statutory footing for the first time.

It is important that all directors, including non-executive directors and “de facto” directors (those who are not statutory directors but who have control over or influence the board), fully understand their role and responsibilities. In certain circumstances, directors can be held personally liable and/or disqualified from holding office for wrongdoings.

Shareholders should also look to formalise the operation of the company and the ways in which they can exit the business in the event of any breakdown in relationships. 90% of UK private companies have less than five shareholders who, typically, participate in the management and operation of the company. When disagreements occur - which cannot be resolved amicably - shareholders have few options in the absence of protection in the company's constitutional documents or any agreement between shareholders.

Putting in place a shareholders' agreement is also an opportunity for the people with interests in the business to consider in depth the direction of the company and identify those matters affecting the company which should be subject to joint decision-making. Failure to deliberate these matters at the outset can lead to frustration and deadlock in the future.

Employees and Contractors

Employers are obliged to give employees written particulars of the main terms and conditions of their employment. It is usual for these to be incorporated in a formal contract of employment, as this enables the employer to reduce the risk of a dispute arising out of any uncertainty or ambiguity. In particular, directors' service contracts have recently been the focus of much public scrutiny. Litigation in recent years between businesses and executives has often been decided on intricate details in the drafting of service agreements. This is why the more senior the employee, the more detailed their contract needs to be.

Protecting intellectual property and know-how is key to maintaining the value of any technology focussed business. If an employee is likely to have access to confidential information, the employment contract should look to prevent the employee from using such information for personal gain or disclosing it to third parties. Employers should also look to use restrictive covenants to extend protection following the termination of any employees who have had access to sensitive business information which could be beneficial to competitors. If the work of an employee or contractor is likely to produce intellectual property rights, the employer should ensure that these are assigned to the business.

In addition, certain mandatory statutory employment protection rights will apply regardless of the contract between the employer and employee (or contractor). Since the early 1970s, there has been dramatic growth in the amount of UK employment legislation, notably in the following areas:

Maximum Working Hours: Employers must take all reasonable steps to ensure that workers do not work more than an average of 48 hours per week, unless the worker voluntarily opts out by way of written agreement.
Anti-Discrimination: Comprehensive anti-discrimination legislation applies to all staff (including individual independent contractors) and governs every stage of the working relationship, from advertising vacancies to dismissal.
Health and Safety: An employer is under a duty to take reasonable care for the safety of employees. This extends to preventing psychological (as well as physical) harm, such as stress from overworking.
Pensions: Any employer who employs five or more employees and does not already provide pension arrangements must designate a stakeholder pension scheme that employees can join if they want to.
National Minimum Wage: From October 2005, the rate for workers aged 22 and over is £5.05 per hour. This is usually increased annually.

Five Steps to Avoiding Costly Disputes

Look to standardise the main terms and conditions for business.
Ensure all directors, including those who instruct the board, are aware of their duties and obligations.
Enshrine protection for the company in service agreements with directors and key employees.
Formalise the decision-making process and management of the company between shareholders.
Consider a legal audit to check on-going compliance

If you have any questions or would like to discuss anything in this article in more detail, please contact Andy Moseby at Kemp Little LLP on 020 7600 8080.