In this issue

The Company Director
The price of loyalty
Short Skirts
References
Human Rights
Passive Smoking
Advocates liability

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Editorial

Welcome to the autumn edition of The Orchard.

As usual we seek to cover a variety of issues. In this edition we deal with a number of matters in the fast moving employment arena.

As solicitors who specialise in advising on company issues we also devote particular attention to directors duties.

This edition sees the first in a series of articles covering all aspects of directorship.

As a director or would be director it is important to be aware of the responsibilities and liabilities which go with the job.

We wish all our clients and friends well and do hope that you enjoy our latest issue.

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The Company Director

This edition sees the first in a series of articles covering all aspects of directorship. Whilst articles of this nature cannot hope to tackle the vast array of issues affecting directors every day, we hope they will provide some useful guidance and help to highlight the central issues.

We start with the directors' duties of good faith and skill and care. We will explain in the next edition those to whom the duties are owed: the company, its creditors and employees. We will also deal with the statutory duties imposed by the Companies Act.

Good faith

Essentially the director's duty is to act bona fide in the interests of his company and to use his powers only for the purposes for which they were conferred. These are not necessarily the same things

A director will be acting bona fide if he genuinely considers that he is acting in the company's best interests (a subjective test). But, in doing so he may be using his powers improperly for an unauthorised purpose (an objective test)

A typical example might be where directors issue shares. They may do so not to raise capital needed by the company (an authorised use) but to defeat a controlling shareholder or a takeover bid (unauthorised uses). Even if they consider that unauthorised use to be in the best interests of the company, it will still be in breach of duty

As an agent of the company, any contracts entered into by the director are made on the company's behalf. If, however, a director contracts in his own name without reference to the company, he is likely to be personally liable on that contract

Conflicts between the interests of the company and those of the director personally should be resolved in the company's favour and no personal profit should be made from opportunities arising from directorship - in either event, the director may be called upon to account to the company for any profit made by him, since even if he has acted honestly he may yet be in breach of duty

Skill and care

What expertise is a company director expected to demonstrate? Until relatively recently the answer was probably "very little" in that the courts did not require any particular level of competence or diligence.

Today's thinking is rather more enlightened and the modern director has to show the general knowledge, skill and experience that might reasonably be expected of a person carrying on the same functions as he carries out for the company. This is an objective test effectively precluding any defence based on ignorance.

There is also a subjective test applicable to those directors who, by virtue of their qualification or experience, might reasonably be expected to demonstrate greater care or skill than others, eg directors particularly responsible for the preparation of accounts or who profess to have accounting or business knowledge. The subjective test, it should be noted, serves only to increase what might be expected of a director - never to diminish it.

Here are some examples

Cheque signing

Often the board will have delegated the accounting and book-keeping function to one of its number and the Articles will set out the proper procedure for this. Once there has been delegation to an apparently competent and honest officer (or co-director) the law does not require each director constantly to supervise his activities, or to query and investigate every transaction performed within the scope of the delegated power

On the other hand, if there is anything which seems to be a bit odd e.g.

• an unusual payee
  
  
• payment of an unusually large amount
  
  
• a cheque drawn at an unusual time

The very least the director should do is enquire, even if to do so may be awkward or embarrassing. This is even more so where the delegation of power is total, as where one executive director effectively "runs the show" whilst another is simply relied upon or "used" for formalities and signatures

The signing of blank cheques, even in circumstances of complete trust, is likely to result in liability for specific and general negligence should that trust ever be abused. Do not take the risk

Investments

Even if a proper officer has been delegated responsibility for the investment of company funds and safe custody of any securities, the basic duty of each director will be to ensure that the company's assets are being managed as required by the Articles and by any stated board policy. A failure to check on this from time to time would expose the other directors to criticism which may lead to liability in negligence

Professional advice

Directors are entitled to rely on qualified professional advice where appropriate. Having obtained advice, they may (and as a general rule must) exercise their own judgement as to how or indeed whether it should be acted upon. There will however be situations where their duties require them to seek advice and to act on it with little scope for discretion. The clearest example is the board of a company in financial difficulty. The sort of advice which they receive may be critical to its survival or to its orderly dissolution and will almost inevitably be the sort of advice which it is not in the board's discretion to ignore

Diligence

Although directors are entitled, in the absence of circumstances calling for enquiry, to rely on officers to whom particular areas of responsibility have been delegated, this is heavily qualified by duties to supervise and inquire into the conduct of the company's affairs

It will be no excuse that a director was unable to attend regular board meetings because of his location or perhaps his long-term ill-health. If he is unable, for whatever reason, to pay reasonable attention to the company's affairs (even if only sufficient to check that the company is not in default of its duties), he will be in breach of his duties. If he cannot do so he should resign.

Clare Harris

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EMPLOYMENT LAW

The price of loyalty

We are frequently asked to look at restrictions in employment contracts. A senior employee may be thinking of setting up on his own; an employer may want to sell the company and know that key personnel are committed. Many employees hesitate to move because they mistakenly believe that they are locked in; many employers make the same mistake. In our experience, because the law in this area is so fast moving, most restrictions that have not recently been updated are unenforceable.

The basic principle is that the courts do not like restrictions on employees' freedom, and will only enforce them where they are limited to what is strictly necessary to protect the employer. If the employer's restriction is too wide then the court will usually strike it out altogether.

Two recent cases have shown that where an employer drafts his restrictions carefully, the courts may uphold them.

• In ICS v Hart, the employee was a senior manager who left to set up his own consultancy. Before leaving he approached a potential customer of ICS with whom the company had been in discussion. His contract contained a restriction that prevented him from soliciting business from customers with whom he had had dealings even if he had not dealt with the particular business that moved to his new company.
  
  The employer had gone on an extensive evidence gathering exercise and had found records down loaded from Mr Hart's personal computer showing his notes of discussions with the customer before he left ICS. This lost him the sympathy of the court.
  
  The restriction, drawn in the light of the most recent cases, was found to be valid. A twelve month injunction was placed on Mr Hart.
  
  
• In S B J Stephenson v Mandy, Mr Mandy left his employers to set up his own insurance broking business. Argument concentrated on a restriction against poaching employees and also on the employers' insistence on garden leave.

One tactic frequently used by employers, particularly if they are in doubt about whether a restriction will be valid, is to put the employee on garden leave for his notice period so that they can set up new customer relationships before he is able to start his new business. Here Mr Mandy argued that the company could not put him on garden leave because the contract did not contain a provision to that effect. That is generally the rule, but the court found that the company's obligation was simply to pay Mr Mandy and that they did not have to give him work to do. They were therefore entitled to tell him to sit at home and not contact clients for his notice period.

The contract also contained a restriction against poaching employees which was found to be valid. It was limited to those employees with whom Mr Mandy had had dealings and this limitation was essential to make it valid.

Again in this case the court found evidence that Mr Mandy had been approaching customers and employees in the interest of his new business before the end of his employment with S B J Stephenson. This is always a factor that will count heavily against an employee in cases of this kind.

Richard Holmes

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Short Skirts

An employee of the employment advice company Peninsula recently succeeded in a sex discrimination case against her employers. She was going for internal promotion and her manager suggested that her chances might be improved if she "wore a short skirt and a see through blouse". The manager said that this was obviously a flippant remark. The Tribunal was not interested in the manager's sense of humour and awarded compensation to the employee.

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References

In the recent case of TSB v Harris an employee successfully argued a constructive dismissal case over a bad reference given by her employer when she applied for another job. The reference stated that there had been 17 customer complaints made against her. This was true but the employee had not been told about the complaints. The Tribunal therefore found that it was unfair for the employer to mention them in the reference. The general rule is that an employer is not obliged to give a reference but must give one that is fair and accurate if he does. This case shows new risks in doing even that.

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Human Rights

The Human Rights Act is now in force. It is already having a considerable impact in the courts, for example in the Court of Appeal debate determining the future of Siamese twins, Jodie and Mary. In that case the NHS Trust responsible for the twins had applied to the High Court for permission to separate them without the parents' consent. Following the grant of permission, both the parents and the Official Solicitor ( the latter representing the weaker twin Mary) appealed to the Court of Appeal. All sides relied inter alia on the right to life now enshrined in the Human Rights Act to support their submissions, the NHS Trust citing the same provision on behalf of Jodie.

The purpose of the Act is to incorporate into UK law the European Convention of Human Rights made in 1950. Broadly it will influence the interpretation of existing and future legislation which must now be construed in the light of the Act. Public authorities, including all local authorities, NHS Trusts, Government Agencies and the courts must act in a manner which is compatible with the Act e.g. in providing for the right to a fair trial, prohibition of discrimination and freedom of expression. Thus the Act can be directly used in two ways, as a free standing cause of action when a convention right has been violated by a public body such as a NHS Trust or in providing a defence in proceedings brought by an enforcement authority such as the police and the Health and Safety Executive.

The impact of the Human Rights Act will radically affect vertical litigation (i.e. where individuals assert their rights against actions of the State) but it will also have an indirect effect upon horizontal litigation (i.e. actions between individuals). It will be for the state to ensure that the balance of rights between citizens reflects the rights which have now become part of our domestic law.

We will in future editions provide guidance as the courts interpret the Act.

Rachael Harkness

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Passive Smoking

The Health and Safety Commission (HSC) has announced plans to introduce a Code of Practice on passive smoking in the workplace.

The Code will require employers to take active steps to control tobacco pollution, such as segregating non smokers and restricting the time an employee may be exposed to tobacco smoke.

The HSC has indicated that there will be a transitional period of 2 years during which pubs, clubs and restaurants which have signed up to the voluntary Public Places Charter will be regarded as complying with the Code of Practice.

Failure to comply with the Code will not be an offence in itself. It could however be evidence of an offence under the Health & Safety at Work Etc Act 1974, which places a legal duty on employers to ensure that they have taken all reasonably practicable steps to ensure that the workplace is safe and without risk to health. Employers electing not to comply with the Code will therefore expose themselves to the possibility of criminal proceedings. Failure by employers to observe the Code could also support a civil claim for damages by any employee alleging health problems sustained through passive smoking at work.

Judith Kelly

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Advocates liability

In the summer edition of The Orchard we explained that the principle of barristers' immunity was under consideration by the House of Lords. In July the Lords handed down a landmark judgment in the case of Arthur J S Hall & Co v Simons.

Previously as a general rule a barrister was immune from any claim arising out of almost anything said, done or omitted whilst conducting a case in court.

All this has now changed. Advocates immunity has now effectively disappeared. The Lords decided that social and legal changes over the 30 years since the matter was last considered means that there is no longer any public interest in preserving immunity. This does not necessarily mean however that every disappointed litigant who loses at trial will be able to turn on his barrister. The claimant still has to prove that the defendant acted in a way which no competent barrister would be guilty of. The Hall judgment will still have to be interpreted by the courts in other cases and itself give rise to a healthy debate in particular professional negligence cases.

Adam Chivers

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