One-sided contract term of the day (3): grossing-up of withholding tax

Tax can be interesting! This golden oldie tackles a perennial commercial and drafting issue in licence agreements – who takes the risk of witholding tax?

IP Draughts

We continue our series highlighting IP Draughts’ “favourite” one-sided provisions in contracts.  These provisions are often found in contracts where there is an imbalance of power between the parties, and where the party with the power (let us call him the “Patron”) seeks to reduce a sometimes theoretical risk by imposing it on the other party (the “Supplicant”).

Today’s one-sided term is:

If any withholding tax is levied on the Payments, then Supplicant shall increase the sums paid to Patron so that the amount received by Patron after the withholding tax is deducted is the full amount Patron would have received if no withholding or deduction had been made.

This term differs from some of the others in the series in a number of ways.  First, it is focussed on an IP issue, or rather an IP tax issue – withholding tax.  Some of the other terms in the series…

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Mr Pettifog’s TUPE claim

It has been a stressful week at Anderson Towers. Jim Rough-Diamond, our employment law partner, has been trying to manage a TUPE claim that Mr Pettifog has brought against the UK government.

Regular readers will recall that Mr Pettifog has been acting a trade representative of the UK government to Nigeria, reporting to Dr Liam Fox, Secretary of State for International Trade. This has involved Mr P in several trips to Africa. Although he gets his expenses paid for these trips, including flying business class on British Airways (with the occasional, satisying upgrade to first class), he doesn’t receive any fee for his services. The thought of giving advice for free has rankled with Mr Pettifog, and he has been known to bore his friends for hours on this subject during drinking sessions at Ye Olde Cheshire Cheese.

Six months ago, over dinner with his friend Jumbo McCorquadale QC, they came up with a plan to resolve this financial lacuna. Mr Pettifog would form a company, Pettifog Research Limited, which would undertake trade-related research for the Department for International Trade (DIT). Jumbo knew a procurement officer at DIT and would wangle it for an invitation-to-tender to be issued to undertake research on the West African economy. The tender selection criteria would be “adjusted” to favour bidders who could demonstrate direct experience of representing the UK government in trade talks in West Africa.

At first, the plan seemed perfect. Mr Pettifog’s company won the tender, after making the only short-listed bid. The fee was to be £250,000 per report, with up to 6 reports to be prepared under the contract. Mr Pettifog hired two interns, on a fee of £10,000 per annum each, to do the research work and prepare the reports.

But after a month, it all started to fall apart. The procurement officer wrote an unfortunate email to Jumbo McCorquadale, asking for her fee, which was picked up by the DIT security department. She was fired. The contract was cancelled, as was Mr Pettifog’s role as trade envoy.

It wasn’t all bad. The work of the two interns had impressed the project manager at DIT, and they were recruited by DIT on salaries of £45,000 plus London allowance.

At this point, Mr Pettifog and Jumbo McCorquadale QC came up with a cunning plan. Mr Pettifog would bring a claim against DIT arguing that the activities of Pettifog Research Limited (PRL) had been brought in-house by DIT and therefore all employees of PRL automatically became employees of DIT under TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006. The two interns had, of course, joined DIT as employees, which was evidence of a TUPE transfer.

It turned out that Mr Pettifog had a written contract of employment with PRL under which he was to be paid a salary of £250,000 per annum. So, Mr Pettifog brought a claim for unfair dismissal and breach of contract against DIT as his new employer.

Lord Falconer remembers what he said to Mr Pettifog

Much against his better instincts, Jim Rough-Diamond prepared the claim on behalf of Mr Pettifog. Mr Pettifog had reassured him that several leading advocates had agreed to act on his behalf, if it ever came to court, including Lord Falconer QC (former Labour Lord Chancellor), Sir Keir Starmer QC (former Director of Public Prosecutions) and Cherie Booth QC (former …well, current wife of Tony Blair).

Unfortunately, DIT has now counter-claimed, alleging fraud, and asking for security for costs. And Mr Pettifog has received in the post, without any covering letter, copies of some photographs that appear to be of him in a state of undress at a notorious club in Budapest. Jim Rough-Diamond opened the envelope in which these photos were sent, believing it to be connected with his employment claim. Which, in a way, it is.

Jim Rough-Diamond is now in a sanatorium, recovering from his ordeal, and our firm’s employment department is rudderless. Mr Pettifog is taking the weekend to decide whether to drop his case. He had hoped to ask Jumbo McCorquadale QC for advice, but it seems that Jumbo has gone on an urgent trip to Columbia, and cannot be contacted.

 

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As you were! Duty of good faith not implied into English law contract.

Too much focus on personalities in this golden oldie, says Mr Pettifog. And no-one should criticise the saintly Baroness Hale, incoming President of the UK Supreme Court!

IP Draughts

baconIt is a while since IP Draughts has seen the English Court of Appeal dismiss so comprehensively the contractual analysis of a High Court judge.

Nearly a year ago, IP Draughts reported on a case in the English High Court,  Compass Group UK and Ireland Limited (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2012]  EWHC 781 (QB), which was heard before Mr Justice Cranston.

The decision in the High Court

chocmousseThe case was fascinating for the light it threw on how a hospital procurement manager behaved in a “challenging” manner with a supplier of catering services.  The contract included a provision for “service failure points” – effectively fines – for non-compliance with service standards.  According to Cranston J, the procurement manager deducted an “absurd” amount for minor failures.  For allowing a chocolate mousse to be in a fridge one day after its use-by date, the supplier was…

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What are “standard terms of business”?

Readers who are English commercial lawyers, and perhaps some others, will be familiar with the provisions of the Unfair Contract Terms Act 1977 (UCTA). Specifically, they will be aware of section 3(1) which, in business-to-business contracts, requires exclusion clauses that form part of “written standard terms of business” to be “reasonable”. Separate requirements apply to consumer contracts, both under UCTA and under consumer legislation more generally. Section 3 of UCTA provides:

3(1) This section applies as between contracting parties where one of them deals on the other’s written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term—

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled—

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

[emphasis added]

These provisions raise a number of questions, including when is a term reasonable. But today’s blog article is on the question of when a party contracts on its written standard terms of business.

For example, consider the following scenarios. In which of these am I required to justify my exclusion clause as reasonable, and in which am I free to impose unreasonable terms?

  1. I send you my standard contract and tell you it is not negotiable.
  2. I send you my standard contract and tell you that it is negotiable, but no change is made to the clauses dealing with liability.
  3. I send you my standard contract and tell you that it is negotiable, and offer to change the limit of liability from the price paid (in the standard contract) to twice the price paid.
  4. I send you my standard contract and tell you that it is negotiable, and agree to something close to your request for liability to be limited to the level of my insurance cover.
  5. I send you a draft contract and make no comment on whether it is a standard contract (but it does bear my company’s logo), and you think it might be based on a template from the PLC database. When negotiating liability issues in this draft contract, I take one of the positions outlined in 1-4 above.

This type of thought process may be relevant to a company that is seeking to limit its liability, eg through standard terms of sale and through standard contracting processes that seek to win the “battle of the forms”.

It may be unrealistic to reach definite conclusions on these points. To date, there has been little judicial guidance. But even if there were a body of case law, the court’s interest in doing “justice” in the individual case may be of more practical importance than general categorisation of this kind.

The recent case of African Export-Import Bank & Ors v Shebah Exploration & Production Company Ltd & Ors [2017] EWCA Civ 845 (28 June 2017) was one of the first times that the Court of Appeal had been asked to consider what are written, standard terms of business. Longmore LJ, giving the unanimous judgment of the court, went through the limited case law that touched on this subject. He approved a judgment in an earlier case which decided that a party relying on UCTA must establish:

  1. the term is written,
  2. it is a term of business,
  3. it is part of the other party’s standard terms of business, and
  4. the other party is dealing on those written standard terms of business.

Usually, he thought, there would be little controversy about points 1 and 2. On point 3, and where the contract was based on an industry-standard contract, he approved an earlier decision in which it had been said:

I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of model forms drafted by an outside body. However, if the Act ever does apply to such model forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the model form is invariably or at least usually used by the party in question. It must be shown that either by practice or by express statement a contracting party has adopted a model form as his standard terms of business. For example, an architect might say, “My standard terms of business are on the terms of the RIBA Form of Engagement”. Without such proof, it could not be said that the form is, in the words of the Act, “the other’s” standard terms of business.

On point 4, he quoted various earlier decisions, including the following quote from a judgment of HHJ Seymour:

…it is not enough to bring a case within Unfair Contract Terms Act 1977 s.3 that a party has established terms of business which it prefers to adopt, as, for example, a form of draft contract maintained on a computer, or established requirements as to what contracts into which it entered should contain, as, for example, provision for arbitration in the event of disputes. Something more is needed, and on principle that something more, in my judgment, is that the relevant terms should exist in written form prior to the possibility of the making of the relevant agreement arising, thus being “written”, and they should be intended to be adopted more or less automatically in all transactions of a particular type without any significant opportunity for negotiation, thus being “standard”.

He also quoted some comments from Nourse LJ in St Albans District Council v ICL, a leading case from 1996 in which the terms were held not to be reasonable:

The fourth requirement is that the deal must be done on the written standard terms of business. That raises the question whether the Act applies in cases where there has been negotiation between the parties the result of which is that some but not all the standard terms are applicable to the deal. In St Albans City and District Council v International Computers Ltd [1996] 4 All E R 481 (the only other case, so far as counsel were aware, which has come before this court on this issue since the Act was passed), the party relying on the Act submitted that, if there were any negotiation of any kind, the Act could not apply. That broad submission was rejected by this court in an obiter passage of the judgment of Nourse LJ with whom Hirst LJ and Sir Iain Glidewell agreed, but Nourse LJ went on to approve (at page 491g) the statement of Scott Baker J at first instance that the deal in that case had been done on the defendant’s standard terms of business because those terms remained “effectively untouched” by the negotiations that had taken place. That leaves open the question of the correct approach when some of the standard terms are not part of the deal.

Longmore LJ concluded:

I would also approve these first instance decisions and hold that it is relevant to inquire whether there have been more than insubstantial variations to the terms which may otherwise have been habitually used by the other party to the transaction. If there have been substantial variations, it is unlikely to be the case that the party relying on the Act will have discharged the burden on him to show that the contract has been made “on the other’s written standard terms of business”.

On the facts, he concluded that the parties did not contract on standard terms of business, and therefore UCTA didn’t apply. He commented:

A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. …It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.

At one level, this case is very specific to its facts. But it does indicate that:

  1. It is for a party that seeks to rely on UCTA to show that the other party was contracting on its standard terms of business. This may seem harsh, but presumably on different facts, where a party puts forward its own template agreement, this may be slightly easier to establish than when a party drafts an agreement based on a third-party template.
  2. If standard terms of business are used, but are substantially changed in negotiations, UCTA doesn’t apply.

There is nothing very earth-shattering about these conclusions, but it is useful to get some guidance from the Court of Appeal on this subject.

 

 

 

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