Streetwise January 2017 – issue 31
February 10, 2017
It is not too late to say Happy New Year. There is a Chinese curse that goes along the lines of “may you live in interesting times”. So I hope you live in uninteresting times in 2017. Let us all prosper and hope the Brexiters were right.
I continue to enjoy the freedom and fun at gunnercooke and will be asking colleagues to write guest pieces in this little publication. This month however, I have included an article from David Tonks. David was the geotechnical engineer on the other side of a case I was in. Sorry, David, I know you wanted to say that we both won but there was only one winner in the fight between your client and mine in the High Court and the Court of appeal and it was me!! I agree that we both won against the other party in that three-cornered fight. David’s calm assessment of the facts and the scientific principles so impressed me (and the Judge BTW) that I decided that I would have him on my side in future, and we have worked together since.
We are working on another training course for directors jointly with RSM hosted by recruitment consultancy Matt Burton Associates. It will be by invitation only. Following my project of looking at a different duty for every issue of Streetwise I tackle the duty to promote the success of the company which on the face of it looks pretty simple but deserves a deeper dig.
What does success look like?
If we take as a starting point that when I am asked for one party or another in a shareholders dispute the first thing I do is examine how the other party has behaved as a director to see if we can get some leverage for a deal favourable to my client, a sensible business person will see that there is more to acting properly as director than simply protecting yourself against the company itself or a regulatory authority.
Before the duties of the directors were defined by statute in the Companies Act 2006 this duty used to be to act in the best interests of the company. It is much wider now and directors have to take into account not only the company but its employees, the environment, customers and suppliers. Directors have a duty to maintain a high standard of business conduct. They also have to act fairly between members.
10 years ago when the Act came into law there was some confusion about what this duty actually meant and we got some government guidance about the essence of this requirement which is that the directors must look out for the long-term interests of the company. The key word in the sentence is “long-term”. The directors have to look to the future and see how business will pan out.
I have dealt before with the fact that the company is a separate being from members. You can see that if the members are in disagreement the directors cannot do what they all want. However, where the members are in complete agreement that directors may still breach their duties if they bow to the common will. An example is where an offer had been made to acquire a company. The members were quite keen on selling their shares and getting some cash in. The directors could see that under its new ownership the company would not do as well as it would have done if it carried on with its current business plan. The directors rejected the offer and the members complained to the courts. The court said that the directors did the right thing because the interest of the members were completely separate from those of the company. Even where they were all agreed, it was the long-term prospects of the company that the directors had to bear in mind.
Some of my readers may remember that there was a lot in the press not that long ago about the possible sale of a pharmaceuticals company to one of the global players. It was feared that the purchaser would not make same level in the of investment as the company currently planned. The offer was rejected. The news reports I read did not give the reasons but I would be surprised if this point was not one of them. Other readers may have had a more in-depth look at the reasons for the rejection.
It makes sense that a company will want to look after not any customers but also its suppliers. It is disruptive to business to change suppliers and although I understand the ins and outs of cash flow I have never been able to follow the logic of putting suppliers under such pressure that they struggle to maintain the supply. The duties to the environment and the employees are new but make sense.
Of course if the company is getting into financial difficulty it owes another duty and that is to its creditors. There may come a point where the duty to the creditors becomes paramount.
These days I get quite a lot of inquiries from boards asking me to help them make decisions so I guess that people and business are alive to the pitfalls of getting it wrong.
Filling in the gaps
My regular readers will have spotted that issue after issue I go back to contractual issues. As I have said before, we all make contracts every day and whether or not a contract exists and its terms are properly crucial to our ongoing success and prosperity. English law allows gaps to be filled in by implying terms in contracts. The idea is that by implying a term the true intention of the parties can be reflected where the parties’ business acumen was better than their drafting skills. But it cannot be done willy-nilly or just because you feel like it. First of all, there is a reasonable man test. So we do not only look at what the contracting parties say, we have to ask what a reasonable person would have understood their intentions to be taking to account the background knowledge available to the parties when they made the contract.
Hot off the press is a decision of the Court of Appeal. What the judges said was that, when deciding if there is an implied term or not, there is a three-step process:
- what do the express terms mean? This includes whether the express terms themselves say that a term cannot be implied;
- is there an inconsistency between the express terms and the proposed implied term;
- is there any inconsistency of substance? In other words, would the proposed implied term be inconsistent with the express terms?
Sometimes terms can be implied because it is an industry norm or to give “business efficacy” to a contract. What a Judge cannot do is rewrite a contract so that it says something that the parties did not intend or to adjust the fairness of the contract in favour of one party against the other. By and large, if you make a bad deal you are stuck with it. Helping people wriggle out of agreements they wish they had not made is one of the things we do.
And now, with a fanfare of trumpets, David Tonks… (queue applause)
On dodgy ground – or many a slip?
The ground beneath our feet is usually so reliable, it is surprising when it gives us problems! But in my line of work we know too well that it continues to catch people out when they may least expect – with consequences that can be expensive and sometimes worse.
Christine and I first met years ago, working on a housing development that had settled nearly 3 m into a peat bog. And the problems were getting worse. The parties had to understand and face up to the deep-seated problems before we could begin to engineer a way out. I will not forget that Christmas, preparing for what turned out to be nearly 5 days of court room cross- examination on the theory and practice of soft ground. Justice was done even though the lives of the householders were turned on their heads for years.
Through the years, our practice has engineered thousands of successful projects on all types of difficult ground. But we have also investigated and advised as independent experts on more than a hundred cases that have ‘somehow gone wrong’ and ended in failures and disputes. These range from buildings settling and cracking, to foundations collapsing and landslides causing major disruption. Most involve ‘only money’, but often a lot of it. Ground conditions are the most common cause of delays in construction, sometimes enormous. Then there is often a high human cost.
A few have been tragic, or came close to tragedy. A particularly sad recent case found us assisting the Coroner’s court. A lady died when a landslip demolished her house during a storm one night. We are continuing to act for the neighbours who live in fear of similar re-occurring. It was held that the Local Authority could and should have known and taken action. The case reminded me so much of my early years in Hong Kong working on Landslide Prevention measures. Several major landslides demolished new housing blocks; many geotechnical engineers and engineering geologists were assembled to make the steep hillsides safe. The procedures developed there still lead the world.
More recently Scotland, in particular, but also Wales and England have suffered the occasional catastrophic event. I think particularly of several landslips, foundation and tunnel collapses that came close to claiming many lives. The recent 50th Anniversary of Aberfan reminded me and colleagues of a tragedy that should never have happened. As we learnt the lessons, we insisted that this could never be allowed to occur again. The knowledge is now extensive – very little is really ‘unforeseeable’. In the UK and much of the developed world the risks now are mainly complacency, lack of diligence or awareness by those charged with managing our infrastructure. Much as I enjoy the drama of the legal stage, my New Year wish is for far less ‘grounds for concern’.
Some of the cases are described in our forthcoming paper ‘Grounds for concern; some lessons from recent construction-related geotechnical failures’. Further details available from the Author
Dr David Tonks, Coffey Geotechnics
The next issue will be in March; in the meantime, you know where to find me if you need help.
t: 07973 224 540