Company Commercial Notepad - January 2010
1. Are agreements to agree enforceable?
The rationale behind legal agreements is to promote certainty and clarity. Therefore, the general rule is that agreements to agree are unenforceable because of a lack of certainty. However, in some commercial situations, it is preferable to leave certain contractual terms outstanding to promote flexibility. In the recent case of R&D Construction Group Limited v Hallam Land Management Limited [2009] CSOH 128, the Court of Session held that an agreement to use reasonable endeavours to agree a purchase price was enforceable.
A landowner and Hallam entered into a 5 year option agreement for Hallam to purchase land at a price to be agreed. The option agreement provided for the price to be the higher of 75% of the open market value of the land or £75,000, with such sum to be determined by an expert if agreement could not be reached. Subsequently, R&D and Hallam entered into a purchase agreement whereby R&D agreed to buy some of the land from Hallam conditional on, among other things, Hallam using reasonable endeavours to agree a "wholly acceptable" purchase price with the landowner under the option agreement. Hallam and the landowner were unable to agree a price and Hallam withdrew from the contract with R&D. R&D then brought an action for breach of contract against Hallam and asked the court to consider (1) whether the reasonable endeavours obligation was enforceable and if so, (2) whether Hallam had failed to use all reasonable endeavours to agree the purchase price and had thereby breached the contract.
The court held that the reasonable endeavours obligation was enforceable because it was directed towards a particular object. In this case, the object in question was a price "wholly acceptable" to Hallam. The subjective nature of the object of the endeavours did not create uncertainty because the option agreement provided for an objective mechanism to ascertain the price in the future. Although the court held that the contractual term was enforceable, Hallam was not in breach of the obligation because it had not failed to use all reasonable endeavours to agree a wholly acceptable price.
This decision demonstrates that where a sufficiently objective mechanism exists for agreeing an unresolved issue, then an agreement to agree could be enforceable. Therefore, if a contractual provision is to be made for agreement at a future date, this must be set out clearly and with a sufficiently objective mechanism.
2. Website Content to be regulated by Advertising Standards Authority
The current position in the UK is that the Advertising Standards Authority (ASA) is responsible for regulating the content of advertisements, sales promotions and direct marketing. The ASA does this through administering two sets of advertising rules: the BCAP Code for broadcast advertising, covering television and radio advertising; and the CAP Code for non-broadcast advertising, covering advertising in media including newspapers, magazines, billboards, cinema, press, posters, mailings, e-mails and online.
However, many forms of advertising currently fall outside the scope of the CAP Code. These include oral communications (including telephone calls), product packaging and point of sale materials. In respect of online advertising, the CAP Code does apply to paid-for space such as pop-up and banner ads, virals, sponsored links, and sales promotions. However, marketing claims that appear on companies' own websites are not currently regulated by the Code, as these are classed as ‘editorial material'.
The failure of the ASA regime to extend to digital marketing has drawn criticism for the inconsistency between regulation of online content and the more traditional modes of advertising. However, there are now proposals to extend the ASA's authority to cover all online marketing, including website content, paid-for comment on blogs, and social networks.
If these changes to the ASA's powers do materialise, companies' own advertising claims will be increasingly exposed and monitored. Consumers should in theory be better protected, and there will be increased opportunities for companies to complain about their competitors' online advertising.
In principle, the ASA's proposed extended reach into digital marketing should be welcomed by brand owners, the advertising industry and consumers alike. However, regulating websites is likely to be difficult and costly to manage, particularly regulating websites that target UK consumers but which are hosted elsewhere.
The proposals are expected to be implemented in the second half of 2010, but will first need to be ratified by the ASA's Board of Finance. If the changes are implemented, companies would be well advised to review their websites and advertising strategies as a priority to ensure that they will be compliant with the CAP Code.
3. Directors Indemnities
A brief summary of the main rules on the level of indemnities that companies may give to their directors:
(a) Defence in Proceedings: Companies may provide funding to directors who are subject to civil, regulatory or criminal proceedings. The funding must be repaid to the company by the director if any such civil or criminal proceedings are brought by the company and the director is found guilty. The company may waive repayment if the director is cleared of any wrongdoing under such proceedings.
(b) Lawsuits brought by third parties: Companies may now indemnify a director against damages awarded as a result of successful civil lawsuits brought against the director by a third party. This is subject to the requirements of what is in the company's best interests.
Companies may not indemnify a director against liabilities incurred to the company by reason of a breach of duty, or criminal, regulatory fines and penalties.
It is advisable that directors ensure that appropriate directors and officers insurance and indemnities are in force.
4. Execution of Deeds and Documents - Companies Act 2006
The execution of deeds and documents remains a largely administrative concern, but directors should be aware of the recent changes introduced by the Companies Act 2006 that may expose them to inadvertently acting beyond the powers granted to them by the company.
Existing methods
Up until 1990 a company was required to affix its seal to every deed that was executed. This requirement was removed by the Companies Act 1989 and deeds could then be signed by two officers of the company i.e. by two directors or by a director and company secretary. These methods are still in place and widely used.
New method
The Companies Act 2006 introduced a provision allowing deeds to be executed by a single director, as long as his signature is witnessed. This ‘sole signatory' method has been introduced to facilitate the execution of deeds by companies with a sole director but no company secretary (under the 2006 Act companies are no longer required to have a company secretary). The new method is open to all companies, not only those with a sole director.
This additional method of executing deeds introduces many advantages:
- It is ideal for companies with only a few directors who may be based in various locations across the country;
- It removes the difficulty of having unavailable signatories which can cause unnecessary delays to important transactions; and
- It introduces a level of flexibility for companies as they can choose to adopt this method at any time.
It is important to note however that the ‘sole signatory' method has important implications for both the company and its officers:
- Company can be bound
A document that is executed by a single director (and witnessed) gives rise to a statutory presumption of due execution and the party contracting with the company is entitled to rely on such execution. It will bind the company even if the articles of association or a private agreement (such as a joint venture agreement or shareholders agreement) requires execution by two officers of the company.
- Directors - unauthorised
A shareholder may challenge a director who has signed a deed for acting outside the scope of his powers i.e. without the authority of the company. As a director, you should therefore be satisfied that such authority has been given (e.g. by a shareholders resolution or by the constitution of the company) before you sign a deed as a single director.
Top tip: Companies should be aware of the availability of the ‘sole signatory' method however, clear internal guidelines should be in place so that directors are aware of their authority to sign deeds on behalf of the company.
Laytons cannot accept any responsibility for any liabilities of any kind incurred in reliance on this Notepad. For specific advice on these issues, please contact your client partner or one of the team at the addresses set out below:
London
Richard Kennett email richard.kennett@laytons.com
Guildford
Ben Crichton email ben.crichton@laytons.com
Manchester
David Sefton email david.sefton@laytons.com
This Notepad is offered on the basis that it is a general guide only and not a substitute for legal advice. If you wish to copy this Notepad please do so, but please acknowledge its source.
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