Business-Lawfirm.co.uk Articles

Using the cloud – some points to consider

Thu, 24 Jan 2013 18:40:29 GMT

Cloud computing has been around for some time, but it is now becoming more widely used. Many businesses not already using cloud services are considering doing so for at least part of their IT needs.

The selection of a cloud service to use will depend on a range of factors – cost, risk, technical, commercial, practical and legal issues. Businesses vary in their response to cloud computing depending upon how they perceive the benefits and risks. Although this article concentrates on legal issues, these factors are often closely linked.

What is meant by ‘cloud computing’

There is no hard and fast definition of what is meant by cloud computing; it varies in the sector. A broad general definition offered by the Information Commissioner’s Office (ICO) in their ‘Guidance on the use of cloud computing’ is “access to computing resources, on demand, via a network.” The ICO goes on to elaborate on each component of this definition.

Cloud computing is a service and the service is generally categorised into three types: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

The US National Institute of Standards and Technology identified some common features:

On-demand – accessible as required by the customer
Network access – accessible when and where required
Resource pooling – supplier, or ‘cloud provider’ facilitates cost savings by serving a number of customers so produces economies of scale
Rapid elasticity – the system can respond quickly to business demands of the customer
Measured service – the customer pays for what it uses, so can reduce its outlay

Preliminary checks

Most cloud services tend to be standard offerings on the cloud provider’s standard terms, generally with little room for negotiation, except perhaps for the largest customers. The cloud service will be a key part, if not crucial, for the operation and success of the business. It is therefore most important to carry out proper checks before committing to a particular cloud service contract. This step, often referred to as due diligence, should cover all the main areas likely to be of concern to a customer including:

understanding the service to be provided and being satisfied that it meets the needs of the business
the costs involved
the standards to which the service will be operated
the support available and whether this will meet the needs of the business
physical and technical security measures in place
the accessibility and transferability of the data stored and processed using the system
compliance with data protection and any other applicable industry-specific governance e.g. in financial services

The first of these is something which will need to be assessed by each individual business and should include a check as to minimum requirements the customer’s IT system is expected to meet for successful use of the cloud service in case any hardware upgrades will be needed. Some of the other points are discussed in more detail below.

Cost

The cost of the service is likely to be one of key drivers in the decision about transferring to a cloud service. Cloud services are usually priced on two main models:

Periodic charges – a standard fee per month/quarter/year for the service calculated on the basis of the number of users and commonly with a limit on the amount of data. This gives certainty provided the standard service does not require too many add-ons which may be less favourably priced.

Usage-based charges – the fee will vary according to the use made of the service, so is more flexible provided that customer has accurately assessed its likely requirements and keeps usage under control e.g. of data storage capacity.

In either case, the customer needs to understand what may give rise to additional costs and the level of those costs e.g. for maintenance and support. It is usually preferable to agree those costs at the outset rather than waiting until the additional service is needed, so that the cost is a known quantity. It is also the area around which a cloud provider may be more open to negotiations.

Price increases

The cloud computing market is a developing one at present so is competitive as new cloud providers enter and existing providers need to keep their prices under review. This can be to a customer’s advantage, but as with any contract the detail is important. A favourable initial price will not seem so attractive if subsequent increases are significant.

In a longer term contract, check if there is a cap on the cloud provider’s ability to increase prices over the term either by a fixed percentage or by reference to a price increase index which might be inflation-linked. If the contract is only for a short initial term the price might well be fixed for that term, but check if there is a right to renew on terms which do not involve a significant jump in the price. Although there would be the option of moving to a new provider that is not always a practical solution for a customer.

Security

After price, security is one of the main concerns often expressed by customers considering going over to a cloud service. There are various aspects to security which need to be considered:

physical security of any premises used by the cloud provider – are the premises constantly secure with only authorised staff allowed access.
technical security - is the type of cloud offering suitable for the data storage and processing needs of the business in terms of whether it is a public or multi-tenanted. Encryption may resolve concerns or businesses with particularly sensitive data may want to look at a private cloud solution, although either of these solutions would affect cost benefits.
staff – what type of vetting and checks are carried out by the cloud provider on any staff involved in the delivery of the service.

Disaster recovery and business continuity

A customer’s concerns about the ability of a cloud provider to respond in the event of some major impact on the service should be addressed primarily as part of the preliminary due diligence checks. If either the customer’s business or the cloud provider suffers fire, theft, terrorist attack, flood, natural disaster or other significant disruption, it is important for the customer to know that the cloud provider has robust data storage and recovery procedures in place to protect the data. These should include regular backups and testing to ensure adequate restoration in the event of loss or corruption of the data.

Service standards

Quality of the service received and standards of performance will be of ongoing importance to the customer’s business throughout the contract term. The way this can be addressed in the contract is by having agreed service levels and a system of service credits if the cloud provider’s performance falls short of the agreed levels and/or a bonus system for achievement above target if that would be of interest to both customer and cloud provider.

The starting point will be a description of the service in the contract which is suitably comprehensive. The service levels should cover the areas of performance which are important for the customer’s business - matters such as the availability of the service and response times. The customer’s requirement as regards availability will depend on whether its business operates 24/7 or during normal business hours. Response times will apply to the system itself and other aspects such as resolution of calls to the helpdesk or other requests for support.

The standard terms and conditions of many cloud providers will not deal with such issues as service standards or offer service levels and service credits, so these are items which will need to be raised and negotiated by the customer.

Use of software, content and other intellectual property

A vital part of the cloud service for the customer will be the right to use software applications. Even though this use will be as part of the online service, the customer will need still an appropriate licence to do so in order that it is not infringing the rights of the copyright owner. The owner may be the cloud provider or some third party. Where the cloud provider is not the owner, then as part of the cloud service arrangements the cloud provider should have the right to sublicence use to the customer or arrange for the customer to be licensed directly by the owner.

The cloud provider will usually seek to exclude liability for content stored using its cloud service and reserve a right to remove data from its server in order to be able to comply with EU obligations. The customer should require advance notification of this to be given and look for an indemnity for any loss to its business for any unreasonable action.

Data protection

Data protection is a large subject in its own right and a detailed analysis is beyond the scope of this article. Cloud service customers need to be aware that they will retain obligations under the data protection legislation for ensuring that data they transfer using the cloud service are secure and not transferred in breach of that legislation. To a large extent a customer will be dependent upon the cloud service provider to ensure that it can meet these obligations, so preliminary due diligence and contractual safeguards backed up by ongoing checks will all be important. The EU recognises that the current data protection law does not fit well with cloud computing and is working on new legislation, but that is a possible future development and does not remove the need to comply with the current rules.

Termination and exit

The cloud computing contract should cover what is to happen when the contract ends. Whatever the reason, there should be provision as to what will happen to the customer’s data, particularly if its present cloud provider becomes insolvent. Without adequate provisions in place the customer could find itself locked into an unsatisfactory arrangement and in great difficulty if the provider fails. This is one reason why the preliminary checks as to security and business continuity are vital.

The way forward

Cloud computing is a developing area and becoming much more widely used and accepted by business users. As is often the case with technological change, legal considerations have not always kept pace. There are likely to be legal developments affecting this area, so it is a case of watching out for those developments as and when they are introduced. In the meantime be aware of the relevant issues, carry out proper preliminary checks, weigh up the potential benefits, risks and legal obligations and make sure that whatever is finally agreed in relation to the cloud service provision is recorded in a written contract.

For assistance in drafting, reviewing or understanding any commercial agreement please contact Sue Mann, business contracts solicitor.

Commercial contracts jargon busted

Thu, 20 Sep 2012 16:01:08 GMT

Most industries and professions have their own jargon. The law is no exception. In fact legal jargon is a renowned bone of contention. We do our best to avoid using jargon wherever possible, but you are still likely to come across plenty of examples in the course of your business dealings. To help you I have put together an explanation of some of the common words and phrases you might meet.

Background	A section near the beginning of the agreement explaining what it is about – not always easy to determine quickly when faced with a long agreement. A name more traditionally used for ‘Background’ is ‘Recitals’.
Clause	Nothing to do with Santa, but the word used to describe each separate paragraph or section of a contract. You will sometimes see reference to a sub-clause where the paragraph is broken down into a number of smaller but linked items.
Condition	An important statement in an agreement. Breach of a contract condition can have more far-reaching consequences than breach of a warranty, including bringing it to an end. Also used to refer to a stipulation which has to be met.
Consideration	We like to think we are considerate of our clients’ needs, but in legal jargon ‘consideration’ is in fact the word used for the price in the contract. It might be money or other way of giving value.
Copyright	The protection given to the creator of an original work to prevent it being copied. (Note: the original idea itself is not protected only the way it is expressed in a material form.) Copyright can be transferred or licensed.
Entire Agreement	A statement in a contract to specify exactly what forms the agreement – usually just the contract document itself together with any schedules. The intention is to exclude items such as any preliminary statements or correspondence which might have been superseded.
Execution	Not as drastic as it might sound, ‘execution’ is the expression used for the process of the parties finalising the agreement. For most types of contract this will be simply signing the document. There are some types of document which have to be completed in a specific way for them to be valid. This applies particularly to deeds which used to be sealed with red sealing wax, but which are now generally ‘executed’ by the signatures being independently witnessed.
Force Majeure	An expression imported from French law, usually applied to events beyond the control of the person affected e.g. extreme weather etc. It does not have a standard meaning in English law, so if used the contract needs to define what is meant by it.
Guarantee	Parents with children at college and company directors will be familiar with guarantees. It is a legal promise to ensure that someone else fulfils their obligations and/or a promise to fulfil those obligations if that person fails to do so. A legal commitment to repay someone else’s debt if they fail to do so.
Indemnity	A legal promise to be responsible for another's loss. Unlike a guarantee it is separate from the underlying subject so can continue even if that has ceased to apply. In commercial contracts an indemnity is often combined with a guarantee.
Intellectual Property/ Intellectual Property Rights	This expression applies to a range of intangible rights which, as the name suggests, are original creations. Some common types of intellectual property include patents, trade marks and copyright. Some intellectual property rights need to be registered for their protection.
Jurisdiction	Area over which a court has authority or to which a law applies. In Great Britain the relevant areas are England and Wales, Scotland, Northern Ireland.
Licence	Permission given for something that would otherwise be wrongful or infringe someone’s legal rights. It may be exclusive or non-exclusive, for a set period of time or indefinite e.g. permission to use a copyright work such as a computer program.
Parties	No, we contracts lawyers don’t spend our time at social gatherings (well, not too much of it anyway). ‘Parties’ is the way of describing the individuals or companies entering into the contract. They will be the ones who will receive the benefits and be responsible for performing the obligations they undertake. They will also be the ones who will be able to enforce the contract, or be on the receiving end of any claim.
Provision	An alternative for ‘clause’. Also used as a way of saying that a particular point is covered in an agreement – the point is ‘provided for’ in the agreement.
Recitals	As well as being a series of classical music concerts, it is also a more traditional term for ‘Background’: see above.
Remedy	Not that nasty cough medicine, but a legal way of compensating a wrong under a contract. These may be expressly covered in the contract e.g. a specified credit for a failure to perform, or by law e.g. interest on late payments, or awarded by a court e.g. damages, injunction etc.
Right	In addition to being the opposite of ‘left’, it is also a benefit enjoyed by law or under a contract.
Satisfied	More than just having eaten well, used to mean that a requirement of the contract has been met.
Schedule	An appendix to a commercial agreement rather than your timetable. Detailed information may be put into one or more schedules to improve the flow of the main text or avoid it becoming too cluttered.
Term	How long the agreement lasts. Also used as an alternative expression for ‘provision’ or ‘clause’.
Warranty	A less significant statement in a contract than a condition. An assurance or promise in a contract.

If you have any queries or would like any advice in relation to a commercial contract, please contact Sue Mann Business Contracts solicitor.

Understanding common clauses in a commercial contract

Wed, 19 Sep 2012 11:34:01 GMT

A commercial contract, often called a business agreement, is all about buying and selling products and services. The commercial terms of the deal and the corresponding legal detail will vary enormously from contract to contract, but there are a number of clauses which are likely to appear in some form or other. These are some of the common provisions:

Date

Commercial agreements are commonly dated at the start. This will normally be the date it is signed and certainly shouldn’t be earlier than that. The date is important for a number of reasons – it is often when the agreements starts, or may be when rights or obligations start. If the contract is to apply to any period before it is signed that should be dealt with as a separate issue in the document. Likewise if the agreement will only come into effect later, for example when some required condition is fulfilled, that should be covered separately in the document.

Parties

All persons or companies entering into the commercial agreement should be accurately identified by name and address. If a business is not a limited company, the sole trader or all the partners in the business should be identified by their name and home address.

Background

Many commercial contracts have an introductory section which sets the scene and explains what the agreement is about – sometimes called recitals or preamble. It is not an essential component, but can be helpful. Although it is often stated not to be an operative part of the agreement, care should nevertheless be taken to ensure that it is accurate to avoid any ambiguities.

Definitions and interpretation

A useful device found in most commercial agreements is a section defining key terms used throughout. This avoids the need to keep explaining what is meant by the term on each occasion it appears and helps bring some consistency. It is therefore most important that the terms are given appropriate definitions at the outset and that they are then used consistently throughout the agreement. The section also often contains some statements about assumptions to be made when reading the document, again to avoid repetition and to aid uniformity. An example commonly seen is that any headings which appear are purely for convenience and do not affect the meaning of the document. If there are other documents which relate to the agreement in question it would be sensible to consider an order of priority which is to apply if there is any conflict or ambiguity between them.

Main subject of the contract

The subject matter of commercial agreements will vary enormously, covering a wide range of goods and services. The content of each contract will need to be specifically tailored to deal with what each party is to do, how and when those obligations are to be performed and so on. Considering that detail and documenting it will be a key part in the success of the business relationship. The content which will be appropriate for each contract will need to be considered on a case by case basis and drafted accordingly. Although dealt with here in a short paragraph, depending on the type and complexity of the arrangement, it is clearly vital that the detail of the commercial deal be thoroughly and properly documented.

Price and payment

This will be the section of most interest to a business: what is to be paid, when and how. You may come across the expression ‘consideration’ in some legal documents. That is simply a legal word for the price or value to be paid. From a business point of view the agreement needs to set out clearly what each party is to pay or receive for the products or services. If the price is not a fixed sum, set out how it is to be calculated. State how and when the price has to be paid and whether there are any extras to be added such as expenses. If the payment is not made on time, set out any potential consequences such as a right to charge interest or suspend delivery.

Limitation of liability

An important area needing careful consideration, especially for suppliers of goods or services, is whether, and to what extent, their liability under the contract can be limited, or even excluded, rather than being left completely open-ended. Without such limitations, the supplier of a faulty component worth only a small amount might find itself on the receiving end of a large claim based on the value of damage to an expensive product in which that component has been used. Even if such a claim can be successfully defended, it can be expensive and time-consuming for the supplier to deal with. It is far preferable to agree a suitable limitation in the contract at the outset.

There are restrictions on the extent to which liability can be excluded or limited. Some types of liability cannot be excluded or limited at all, e.g. death or personal injury caused by negligence. For them to be effective, such clauses need to be carefully drafted with proper advice where necessary. Although this article concentrates on business contracts, it is worth pointing out that a business dealing with consumers faces greater restrictions on the extent to which it can limit its liability, so caution needs to be exercised in such cases.

Termination

If a contract is ongoing for an indefinite period, there will need to be a provision setting out how and when it can be brought to an end. Even if a contract is for a set period of time or for a specific purpose and so has a defined duration, it will usually still be appropriate to set out events which will trigger termination either automatically or giving the ‘innocent’ party the right to terminate the agreement. Such provisions will also be relevant to indefinite contracts. Circumstances where a wronged party may want to be able to terminate the contract include where the other party is in breach of its obligations under the contract or is in administration, receivership or some other type of insolvency-related situation.

General provisions

Many commercial contracts contain provisions, often towards the end, sometimes grouped into a section called general or miscellaneous provisions. These provisions cover a range of matters such as the law and jurisdiction which applies to the contract, force majeure, severance, entire agreement and so on. For an explanation of these legal concepts and others, see Commercial contracts jargon busted.

Signature section

For certainty, most commercial contracts will include a section, usually at the end, or before any appendices, for the contract to be signed by the parties to it. This is why it is important to identify the exact legal form of all the parties and, if they are not individual people, to establish who can sign on their behalf. Although the days of sealing wax are long gone, some contracts have to be signed in a particular way for them to be valid, e.g. deeds, in which case the appropriate form of words will need to be used.

This article introduces some of the main areas to be found in most commercial agreements. Each deal will have its own particular requirements to be addressed. For assistance in drafting, reviewing or understanding any commercial agreement please contact Sue Mann, business contracts solicitor.

Software development agreements: key points for developers

Wed, 06 Jun 2012 12:02:40 GMT

Winning a tender, or being selected, to develop a new piece of software for a client is a great boost for any software developer. You’ll no doubt have a standard method of project planning for sizable software development projects, from scoping, risk identification, change management to timeline development and final testing.

In planning the project however there is one step that is sometimes overlooked or may be rushed through and that’s getting a properly drawn up software development agreement in place, before any work commences.

The software development agreement should:

Define the development project
Identify the responsibilities of both client and developer to achieve completion
Manage client expectations
Identify and manage risks and liability

The company commissioning the software will be investing a great deal, not only in terms of the time and money they will need to allocate to the project, but also in terms of the hopes they will have for the positive impact the software can have on their business. We all know that sometimes client expectations can be unreasonable, so the only real way to protect your interests is to have a properly drawn up agreement.

It is in the interests of both developer and client for the agreement to be fairly balanced to help the project run smoothly, but there are certain issues that a developer must cover in the development agreement.

1. Specification(s)

Whether the software development relates to a new piece of software or modification of existing software, the agreement should specify precisely, and in sufficient detail, what the project is to produce. This is important to identify the developer’s role and will go a long way towards reducing the scope for later disputes. The developer must obviously understand what the client wants the software to achieve in its business. The client may well have produced a specification setting out its business requirements for the software that it wants developing - that may be in outline or contain considerable detail.

In all but simple cases, it is preferable for the developer to prepare a technical specification as to how the client’s requirements are to be achieved. The technical specification should be accepted by the client and form part of the development agreement. The client will generally expect the developer to give warranties as to the performance of the software (see 7. Warranties below). The developer will be more comfortable in giving appropriate warranties about the software judged on its technical criteria and the developer’s performance can be more objectively measured against specific technical criteria for the software than against business requirements. The technical specification therefore fulfils several functions in that it can help in defining the developer’s obligations, managing the client’s expectations and risk management in terms of reducing potential areas of dispute.

2. Project plan

The agreement would preferably include a plan for implementation of the software development setting out the development stages with realistic timescales attached. The initial proposal or tender documentation may have contained such a plan. If so, that should be reviewed and included separately in the agreement with any necessary amendments. Although many of the deadlines will apply to the developer, there will be some deadlines for the client to meet including acceptance at various stages of the development. There may also be actions which the client needs to take on which the developer’s ability to perform may depend such as providing certain facilities, equipment or information. The developer will want to know that it has some leverage if the client does not perform such obligations on time as delay on one project may well have a knock on effect on the developer’s performance in other projects.

3. Client’s obligations

Matters to which the developer would expect the client to attend need to be set out together with any consequences of delay or failure to do so e.g. extensions of time for the developer. These might include such matters as providing information or facilities, making appropriate personnel available to liaise with the developer, acquiring and preparing any relevant equipment, ancillary software etc. ready for the installation and testing of the software being developed.

4. Change control

A procedure to control and manage changes to the agreed project is essential in any software development agreement. Otherwise changes may be agreed informally between the developer and client staff working on the project without being properly documented, rather than being approved at the appropriate levels within each business. Without a proper change control process changes can cause project costs to escalate and delay completion. Changes which are not properly managed are also a notorious cause of disputes.

5. Acceptance procedure

When the software has been developed, it would benefit both developer and client to be able to confirm that it meets the agreed requirements. This is typically measured by acceptance testing. The acceptance tests are usually drawn up and run by the developer, but the client may want to be involved in the testing rather than just receive the results. The agreement should also set out how acceptance can be assumed if the agreed standards are met, so that if the client declines to be involved or claims that the software does not meet the required standards the developer has an objective way of completing the project.

6. Pricing

Software development may be done on a fixed price basis, on a time and materials basis or some combination of these methods. Some mutually acceptable basis will need to be agreed and documented in the agreement. In many projects the developer is likely to want payment in instalments rather than waiting until the development has been completed before receiving any payment. The agreement should set out the basis and timing of the instalments. Where instalments are linked to completion of stages of development, clear criteria should be specified to avoid any disagreement as to whether a payment is due.

7. Warranties

The client will expect some assurance in the agreement about the quality of the software being developed. It would generally be unreasonable for a supplier to refuse to give any such assurances – commonly referred to as warranties – and a complete exclusion is likely to be invalid, but any warranties will need to be carefully drawn from the developer’s point of view to make sure they are appropriate. A carefully drawn specification in conjunction with a project plan, change control procedure and other appropriate detail will all help in defining the scope of any warranties given.

8. Limitation of liability

The developer will want to limit its liability for breaches of the agreement and its warranties in relation to the development. The limitation has to be framed in a legally acceptable way, (as a complete exclusion of liability is highly unlikely to be valid). The issue from the developer’s point of view is to achieve a balance between what is likely to be reasonable and acceptable in court if challenged by the client against accepting a level of liability with which the developer is comfortable. Limitation of liability is a difficult area. Software development contracts have given rise to many of the cases on limitation of liability which have come before the courts in recent years, so it is an area where the developer should give careful consideration and take appropriate advice.

9. Rights in the software

The client often takes the view that because they are paying for the software development it ought to own all the rights to it. That will not usually be either legally possible or acceptable to the software developer. It is unlikely that the whole of the software will be written just for the client – the developer is likely to use a combination of elements including modules that the developer has written previously or adapted from such modules, third party materials and some developed expressly for the client but which the developer may then want to use as the basis for future work. The developer can only pass to the client such rights as it itself has and should only do that to the extent it does not want to use such rights again in future. Rights granted to the client must be carefully drafted to protect the developer whilst allowing the client to use the software to the agreed level. If third party software is needed to use the software developed under the agreement, the agreement should make it clear that the relevant licences must be obtained and whose responsibility it is to do so.

10. Additional services

If the developer is providing other services in relation to the software development, such as training, the scope of that obligation should be set out. If there will be ongoing services such as updating, maintenance or support it may be preferable for those to be covered by a separate agreement or agreements which can be attached to the main development agreement.

Getting expert advice

This article can give only an indication of some of the main issues to be addressed in relation to software development agreements and can only deal with these in a general way. Software development is a complex technical area and gives rise to many legal issues. It is important to consider these carefully to avoid problems arising in relation to the project.

For advice in relation to software development agreements please contact Sue Mann.

Using contractors? You need an agreement. Here’s why

Thu, 29 Mar 2012 14:02:59 GMT

As with most business relationships, when using contractors to fulfil a business need it is always preferable for the details of the relationship to be worked through fully and agreed in writing. This article highlights some of the specific factors which need to be considered when entering into an agreement with a contractor.

What is a contractor?

In this article the term contractor is used to apply to a self-employed contractor, so someone who is not an employee of the business. A number of different terms may be used to refer to such self-employed contractors. In addition to contractor there is consultant, sub contractor, associate, partner and sometimes advisor, counsellor, coach, instructor and so on, although many of these terms can overlap with titles which may also be applied to employees so the title itself is not conclusive.

Reasons for using contractors

There are various reasons why a business might decide to use a contractor rather than engaging an employee with similar skills and expertise. These include situations such as:

Wanting to respond to a new opportunity, offer a new service or cover a business requirement for a skill without committing immediately to it by expanding staff and infrastructure within the business
Maintaining flexibility to respond to fluctuations in client demand without the addition of staff whose skills might not be fully occupied
Insufficient skill or expertise within the business to offer or supervise the area in question
A strategic decision to run without full time employees and instead draft in contractors as and when the workload dictates (common in the construction, IT and training industries)

Contractor's status

A key issue for many businesses which decide to use a contractor will be that the contractor will be self-employed, and will be treated as such particularly for tax and national insurance purposes. Provided the contractor is truly self-employed the business will not have the responsibilities and obligations as employer which would apply if the contractor were to be an employee of the business.

It is not always easy to determine whether a contractor really is self-employed. There is a range of factors which are taken into consideration in determining self-employed status. Some will almost invariably indicate employment, whilst others will tend towards indicating self-employment. In between is a whole spectrum of possibilities which can leave the business relationship with a contractor uncertain. Different tests may be applied by the courts, employment tribunals and tax authorities. What is certain is that the label attached by the parties to the business relationship is not conclusive: it is the way the relationship works in practice that will determine the contractor’s status.

Some contractors operate via their own company. This can be of assistance in indicating self employment, but in itself is not conclusive. If a business is working with a contractor in this way, so that it is in fact contracting with the contractor’s company, there are other safeguards which it may wish to consider putting in place to deal with aspects of the relationship.

If the business is using a contractor to seek orders it will also need to consider whether the contractor is in fact an agent of the business in which case other rules may apply, but those rules are outside the scope of this article.

Parties

In the agreement with the contractor, it is important to identify the correct person from a legal point of view. Many contractors will use a business or trading name, but the contract should be with the individual unless they work via a company in which case, as indicated above, the business may wish to consider putting other protections in place as well.

Length of the engagement

The business will need to agree with the contractor whether the contractor’s services are only required for a set period of time or for a specific piece of work and, if so, specify that in the agreement. If the business’s requirement for the contractor’s services is indefinite, the question of how the arrangement can be brought to an end by either party will need to be considered including such matters as appropriate notice periods.

Services

It will need to be absolutely clear what the contractor will be doing for the business, so that there will be no gap between expectations and delivery. What the business might expect to be included within a particular remit might be quite different to what the contractor would expect to provide. To avoid any such misunderstandings – which could be costly in terms of time, fees and reputation for the business – suitable levels of detail about the services to be delivered should be agreed.

The type of details to be covered will include where, when and, to any necessary extent, how the agreed services are to be performed. It will nevertheless be important to bear in mind the self-employed status of the contractor in relation to any directions given.

If the services to be provided by the contractor are in relation to a project, set out any milestones or targets to be achieved in terms of performance requirements and dates.

The contractor will be responsible for ensuring that the agreed services are provided. This will normally include providing a substitute to perform the agreed services if the individual who was to do so is no longer able, for whatever reason, to do so. If the business expects to have any input into the identity of any such substitutes that should be agreed and in such a way as not to impinge on the self-employed nature of the contractor.

Fees and expenses

Set out whether the payment to the contractor will be a fixed sum for the agreed services or whether the whole or any part of it will be variable depending on such matters as the precise type or amount of services required or time spent. If the fee will vary, agree any appropriate measures such as time or amount of services and how performance of these will be demonstrated such as keeping of timesheets, specific requests from the business, certified attendance by a client etc.

Agree with the contractor whether there will be any expenses payable in addition to the fee and, if so, will there be any limits on amounts or types of expenditure, prior approvals needed or evidence required such as receipts.

Payments

It should be clearly agreed whether the whole fee is payable on completion or whether there will be monthly or other interim payments such as parts of the fee payable on achievement of agreed milestones or targets. The payment procedure should indicate how and when invoices should be delivered by the contractor and timeframe for payment to be made by the business, such as 30 days from receipt of invoice. Arrangements for payment or reimbursement of any expenses should similarly be agreed.

Other activities

Provided it does not prevent or otherwise detract from what is agreed, the contractor, as an independent contractor, can normally spend any time not dedicated to performing agreed services for the business in such way as he or she wishes. If the business would expect to have any limitation on that freedom it must be agreed with the contractor in writing. This might apply in the case of activities for a competitor of the business either during or after the engagement where the business may seek to protect its interests. Any such proposed restriction must be carefully structured if it is to be enforceable and not impact on the self-employed status of the contractor.

Confidential information

Depending on the nature of the services, it is quite likely that the contractor will have access to confidential information of the business or even of clients. This should be protected by suitable confidentiality provisions and these should also apply to any substitutes.

Intellectual property

If the nature of the services performed by the contractor is expected to, or might, result in the creation of any intellectual property such as designs, software, reports and so on, the ownership of that intellectual property should be carefully considered. If the business requires ownership of any such intellectual property, either for itself or to pass on to any third party such as a client, then it must be properly documented in writing.

Insurance and liability

A contractor will not normally be covered by the business’s insurance, so the business should check that the scope and level of insurance cover held by the contractor is appropriate for the services being undertaken by the contractor to deal with any loss or damage caused to the business as a result of the actions or failings of the contractor in the delivery of the services.

The apportionment and responsibility for discharging any such liability should also be agreed. Where the contractor deals direct with any clients or other third parties on behalf of the business it will be particularly important to deal with these issues, because in the event the client or other third party suffers loss or damage it will seek compensation from the business.

For further advice or assistance in identifying the issues which need to be dealt with in relation to engaging a contractor and in drawing up an appropriate agreement for that or any other trading contract for your business, please contact our specialist solicitor Sue Mann by phone on 0121 246 4437 or by email at sue.mann@business-lawfirm.co.uk.

Why do you need a shareholders’ agreement?

Tue, 06 Dec 2011 14:22:47 GMT

Many limited companies are started each year by friends, relatives or former colleagues who have a great business idea and a desire to create a successful business. Few, however, appreciate the potential problems they are storing up for themselves by not having a formal agreement in place to set out the ground rules for their ownership of the business, determine the powers of each shareholder or provide a method for resolving disputes between the owners.

The solution is a legally drafted shareholder agreement.

A shareholders' agreement allows the members of a company to agree a range of matters relating to their involvement in the company, so that they will know what will happen in certain circumstances, rather than there either being nothing to govern those circumstances or having a default position implied which might not be that which they would choose. It is therefore a means of ensuring that the company and its affairs are run as you wish.

Some of the main issues which might be addressed in a shareholders’ agreement include:

Financing of the company

what each party is contributing initially and whether as share capital or loan
how any future finance will be raised – will it be by each party contributing in proportion to their shareholding, some other ratio, outside source etc., or how decisions relating to future requirements will be taken.

management of the company

specify what will be the main business of the company
how the directors will be appointed – which may supplement what is contained in the articles e.g. shareholders to be able to appoint themselves or a nominee
appointment of bank, accountant/auditor

dividend policy – will all profits be retained for growing the company or distributed? If not, how are profits to be applied and in what proportions or amounts?

share transfers – in most private companies the members will want to retain control over the shares, so that rather than members being able to transfer them to whoever they want, there will be a mechanism for anyone wanting to transfer their shares to be required to give the other members the first right to buy them accompanied by a formula to value them if the price cannot be agreed. Certain events will trigger those rights e.g. a shareholder being in breach of the agreement, death or ceasing to be actively involved in the business if that is a requirement.

Dealing with deadlock – if the members cannot agree, there are various options which can be written into the shareholders’ agreement to deal with the situation e.g. :

veto – nothing happens without agreement, although that could allow a minority to prevent the majority taking action, so should only be allowed in appropriate cases.
various options are available to allow or require shares to be transferred using bizarrely named formulae such as Russian roulette, Texas or Mexican shootouts etc
arbitration, mediation, independent expert, nominated third party – possibilities although not usually the most satisfactory
winding up – the most drastic option if the parties really cannot agree which might in fact focus efforts on trying to find a solution.

Who needs a shareholders’ agreement?

The members of any company with more than one shareholder benefit from having a shareholders' agreement to govern issues between them not only as members of the company – which can be included in the articles – but personal matters.

Shareholders' agreements could be categorised as covering three main situations:

A quasi-partnership – which is the classic owner managed business scenario where two or more friends/relatives/colleagues set up business together via a limited company, but will often refer to themselves as business partners.
A joint venture between two or more existing businesses which may in turn be individuals or limited companies where the parties come together to undertake a new business in the form of a limited company.
An investment from an outside source e.g. venture capital or other private equity investment. The investor is likely to require extensive controls, even if not taking a majority stake, and will often have its own form of shareholders’ agreement and articles with sophisticated share structures, different classes of shares etc.

What could happen if you don’t have a shareholders’ agreement?

Without a shareholders’ agreement there is much more potential for disagreement between the shareholders, particularly if things start to go wrong. Even though the parties will start off thinking they have common goals and ideas as to how to reach them, those views can diverge over time – one may wish to invest any profits and grow the business; others may want to reap the rewards personally by taking out those profits.

If personal circumstances change or, for example, there is an age difference, one may wish to sell his/her shares, whilst the others want to carry on. The leaver may want to keep their shares or may want to sell them for the highest possible price and may not be concerned who buys them. Those staying on might not want the leaver as a ‘sleeping partner’. They would usually want to be able to acquire the leaver’s shares at a fair price, but without prior agreement they would have no right to do so. Without an agreement, they could otherwise be faced with a new owner of those shares with whom they have no previous relationship or knowledge. That new owner may or may not have any skill in the particular business. In a private company the value may be difficult to assess. The shareholders’ agreement can set a procedure and formula, as well as giving the remaining shareholders a right of first refusal on any sale which they would not otherwise have and can include circumstances where a transfer may be required.

When to get a shareholders’ agreement

Now!

It is always easier to get an agreement in place whilst everyone is in agreement. That might sound obvious, but how often do you hear that people have gone into business together saying they don’t need to spend the time and money on drawing up an agreement because they all agree about how the business will be run etc., but then down the line their views diverge or circumstances change and there is a disagreement? That can be much more expensive and time consuming to resolve and whilst their eye is off the ball, the business they have worked so hard to build up will suffer. This puts at risk everything they have invested.

If you’re in business with a partner, family member or friend, or if you are about to embark on a joint venture or take on external investment, talk to us about a shareholders’ agreement - call 0845 003 5639.

Article written by Sue Mann, Commercial Solicitor, November 2011

Tactics to consider when removing a director or being removed

Wed, 30 Nov 2011 12:06:59 GMT

Removing a director from a company is much more complicated than removing an employee. Before this is done, there are several things to consider and tactics to employ.

The first thing to bear in mind is that, in SMEs, directors usually have 3 different legal roles and the legal position of each is different. The roles are director, employee and shareholder.

Need legal advice? Call 0845 003 5639

The Role of Director

The first thing to do is to look at the company’s Articles. In some companies, these may say that a director can be removed by the Board of Directors; otherwise it is the shareholders who can remove a director.

In all cases, a director can be removed at a meeting of shareholders. The procedure is set out in sections 168 and 169 of the Companies Act 2006. 28 days’ notice to call a meeting must be given and the director will be given the opportunity to put their objections in writing and attend the meeting to put forward their point of view.

To remove a director, more that 50% of votes are needed. This obviously causes real problems in companies where there are just two shareholders each with 50% of the voting power.

Before calling a shareholders’ meeting, there are a number of things to consider.

Are you certain who the shareholders actually are? To vote at a shareholders’ meeting, a shareholder must be listed in the company’s Register of Members. Frequently, a new shareholder might not have been formally added to the Register. If this is the case, they might not be able to vote at a shareholders’ meeting.
Check how many shareholders must be present at a shareholders’ meeting to form a quorum and therefore be able to pass resolutions. The default position is two but this might have been changed in the Articles.
Also check whether the Articles have changed anyone’s voting powers from the usual position that their voting power is in accordance with their shareholding.
Another important thing to check is to see whether the Chairman has a casting vote at a shareholders’ meeting. Article 50 of the old Table A (effective for companies that formed before 1st October 2007) says that a Chairman has a casting vote if there is deadlock. Clearly, this is something to watch out for in a 50:50 company where there are two shareholders each with 50% of the voting power.

The Role of Employee

Removing a director using the above procedure does not terminate their employment. If a director is also an employee (which will be the case if they have a service agreement, an employment contract or are paid under the PAYE scheme), then they will also have to be dismissed. This can be done by the Board of Directors. In companies where there are only two directors, the board will not be able to dismiss one of them.

You don’t have to wait for the shareholders’ meeting before dismissing the director as an employee but beware that a director who has been dismissed could also have a claim for unfair dismissal if unfair procedures are followed.

As part of any agreement removing a director, it might be best to have a formal compromise agreement drafted to prevent the director from going to a tribunal.

The Role of Shareholder

Unless the company has a ‘Buy-Back’ clause in a shareholders’ agreement or in the Articles, then removing them as a director and dismissing them as an employee will not stop them from being a shareholder. They must still be invited to shareholders’ meetings and be entitled to a share of dividends.

It is therefore usually best for the company to reach an agreement for the leaving director to sell his shares. Shares in SMEs are very difficult to value and this will need to be done by an accountant. It is often the case that, in an SME, a minority shareholding is worth less than the percentage of shares owned. Often the Articles or shareholders’ agreements (if you have one) will set out how a valuation is to be undertaken and what principles should be applied.

There are some court procedures that the director/shareholder who has been removed can employ.

As a minority shareholder, he could apply to the court claiming he has been ‘unfairly prejudiced’. If the court is of the view that the company runs in effect as a partnership (the courts call this a ‘quasi partnership’), then removing a director would generally amount to unfair prejudice. The court will usually order that the leaving director’s shares are sold and can set a value but has many other powers it can use as well.

If the company consists of two equal shareholders, then the leaving director could apply to the court to wind up the company.

These court procedures can be expensive and usually the costs would have to be paid for by the shareholders as individuals rather than the company. However, as tactical tools available to the director removed, they can be very useful.

Another tactic the company could use when agreeing on any settlement is to see whether the director it wants to remove has been in breach of any of his director’s duties. If so, this might mean the company could make a claim against the director for him to pay back money to the company. But watch out that the other directors have not also been breaching their duties in the same way!

Act Now and Take Advice

No two situations are the same and it can be dangerous to remove a director without considering your legal position and tactics to employ.

There are also many tactics that the director being removed can employ to obtain a better exit settlement.

For advice, whether you’re a company wanting to remove a director, or a director threatened with removal, contact Gary Cousins or by phone on 0845 003 5639.

Tips for avoiding difficulties with personal guarantees

Thu, 27 Jan 2011 09:39:33 GMT

One of the most frequent enquiries we get at the moment is from company directors worried about bank Personal Guarantees they have signed. A Personal Guarantee is generally given by a director as security for money borrowed by a company in which they are also a shareholder. If down the line the business is unable to repay the bank it then looks to the director personally under the guarantee.

Personal Guarantee Review

Click here

The bank usually limits the Personal Guarantee to a fixed amount but in reality the eventual amount owed can be double after interest and costs have been added.

For a director the consequences can be dramatic –involving, for example, selling the family home in order to pay back the bank and/or bankruptcy.

In the rush to set up a new business or get a project underway business owners might be forgiven for taking a casual approach to Personal Guarantees. This checklist of 12 things to consider when taking on a Personal Guarantee liability and how to handle things if the guarantee is called in is invaluable reading for business owners.

Personal Guarantee Tips

Before giving a personal guarantee

Explore other options you might have that would allow the business to borrow money without you being personally liable. Will the bank accept alternative security?
When you give a personal guarantee the bank will often ask for a charge against your house to secure repayment. Think carefully whether you are prepared to put your family home at risk before agreeing to this.
Take legal advice to ensure you fully understand the implications and consequences of giving a personal guarantee. Never just sign a personal guarantee.
If you can avoid giving a guarantee, do so, because it can have severe implications for your personal finances (including bankruptcy) if the company can’t repay.
Where your landlord is asking for a personal guarantee it is usually best to offer a rent deposit instead.
A personal guarantee is usually a continuing security, which means that there is no termination date unless you are prepared to pay the bank the full outstanding balance of the loan.
If you have to give a personal guarantee, cap your liability to an amount you can afford but always remember that interest and costs can be added to the fixed amount.
Check whether you have already signed a personal guarantee with the bank as they are cumulative. This means that if you sign a guarantee with a limit (say of £10,000) and the bank asks you to sign a new guarantee (perhaps because the business needs to increase its loan) with an increased limit (say £20,000) then unless the bank expressly releases you from the first guarantee in writing, your liability will now be £30,000 not £20,000.
If you have any personal savings with the bank these are in danger if the lender calls in the debt.
Consider that if any co-directors have also given the bank a personal guarantee this does not mean that you repay the bank in equal proportions. The bank will go against the director who they believe has the most assets.

Discharging a personal guarantee

The only sure way to bring your liability under a personal guarantee to an end is either to ask the bank to release you in writing (don't hold your breath) or to find the provision in the guarantee document allowing you to terminate on notice. This will cap your liability under the personal guarantee to the amount owed by the company at that time. You should only do this where the company no longer requires the facility or you cease to be a director/shareholder as inevitably the bank will want the money back. Tactically, notice should be served when the business owes the bank as little as possible or preferably nothing at all.
Lastly, only ever sign a personal guarantee if you are comfortable with the risks.

Tactics to use if a personal guarantee is called in

If the worst happens and the personal guarantee is called in by the bank when your business doesn’t have the funds to repay it, for example if you go into administration, you should take early advice and carefully consider the options available to you as the implications of the bank taking legal action can be severe.

You may firstly want to examine whether the guarantee is likely to be enforceable by the bank. For example, is it backed by a charge on your house; was independent legal advice given and can the original signed document be located by the bank?

The next stage is to look at your ability to repay the money. If the bank has a charge your house or believes there are other assets sufficient to repay the full amount then the room for negotiation of a lower figure in full and final settlement is more difficult, but not impossible. If you have little means to repay then the bank will take this into account during negotiations.

If you discharge the guarantee in full and there were co-guarantors, you may be able to recover from them their share of the total guarantee. The same applies if you pay the bank more than your share. But the opposite is also possible, so if the bank goes after one of the other co-guarantors, that co-guarantor may come after you.

As always, tactics and timing are crucial for any director who ends up in this unfortunate predicament.
The Cousins Business Law Personal Guarantee Review can help in these circumstances. For a fixed fee of £95 + VAT, one of our experienced business solicitors will provide you with practical telephone advice on the best options available for minimising the amount you personally have to pay back. With our help clients have been able to secure big discounts and prevent their home from being sold to repay the debt.

If you are worried about a personal guarantee you have given a bank, landlord or other creditor call Nigel Musgrove on 01285 847 001 or email Nigel to take advantage of our Fixed Fee Personal Guarantee Review.

Read more:

Personal guarantee review service launched

Article updated 23rd August 2012

How to get paid on time - a guide for SMEs

Mon, 17 Jan 2011 13:00:40 GMT

Getting your bills paid on time is vital to the financial health of your business. It’s often quoted that at least 10% of business failures in the UK are due to non-payment or late payment by customers. Managing your cash flow efficiently could be the key to your business survival.

Not only does late payment cause immediate cash flow problems but it also means additional interest on that company overdraft, put at a staggering £33 million in 2009 according to Barclays. Bacs, the organisation behind Direct Debits, reported that in 2010 SMEs had to wait an average of 41 days beyond their payment terms, over 9 days longer than in 2009.

So what can you do to avoid payment problems?

Here's our 14-point guide for SMEs on how to get paid on time

Carry out credit checks on new customers, and repeat them on a regular basis.
Check references from suppliers.
For each customer, establish a credit policy based on their credit check.
Establish sound debt collection procedures. The longer you leave a debt the more difficult it is to recover. So chase early with a polite call or e-mail.
Consider offering discounts for early payment.
Make sure that you diarise invoices for payment and follow up with regular telephone calls and letters. Make sure you record details of every call. Develop a set of standard format letters with increasing urgency based on how long the debt has been outstanding.
Be polite. Research has also shown that being polite in your communications, such as saying “please” and thanking them for their business, both in invoices and chasing letters, can increase the percentages of invoices paid by 5%.
When dealing with large companies, make sure that you speak directly to the accounts department responsible for administering payments.
Make it easier for customers to pay. Provide BACS details. Perhaps make arrangements for payment by credit card. Or sign up to a pay by phone system such as www.paythru.com. And remember that payments made electronically go through far quicker than cheques.
If the invoice is disputed for whatever reason, establish the reasons and address the issues as quickly as possible. It may be prudent to obtain early legal advice so that you are sure of your position.
Make sure your terms and conditions are up to date and include payment terms and interest on unpaid bills, and also suspension of work in the event of unpaid invoices. There is nothing like stopping work and/or suspending deliveries to prompt payment.
Where you are dealing with a limited company, it may be appropriate to obtain written guarantees from the directors. These should be obtained on or before the contract is established. Guarantees can be incorporated into your terms and conditions to be signed by the directors on their own behalf and on behalf of the company.
Where you do not have terms for payment of interest on outstanding debts, use the threat of recovery under the Late Payment of Commercial Debts (Interest) Act 1998. You should include this in your chasing letters.
If you exhaust all reasonable efforts to obtain payment, consider using a debt collection agency or obtain legal advice on your options.

On the matter of interest, if there is no contracted period for payment, and no convention such as 30 or 60 days has been established, then the default period is 30 days. If the parties have not agreed a late payment interest charge, which must be a "substantial remedy" and not a token gesture; it is 8% over the Bank of England base rate. And it is also possible to claim compensation to cover the costs of recovery, £40 if you are owed up to £999.99, £70 if you are owed between £1,000 and £9,999.99, and £100 if you are owed £10,000 or over. Don’t forget that if you have to sue for recovery you can claim this enhanced interest and compensation.

So for example, if you are owed £10,000, and the date of payment under the contact was 1 December 2010, the daily rate will be £2.33 based on a rate of 8.50%, so at 13 January 2011 you will be owed £102.52 late payment interest, and can claim the additional £100 compensation to cover your costs of recovery.

Legal Action

If the customer refuses to pay you can take them to court and claim the interest and compensation, as well as court costs. Even if you have been paid, but paid late, you can still use the law to recover the late payment interest and the compensation.

If the debt is more than about £5,000 it's certainly worth talking advice from a litigation solicitor who will consider the strength of your case and whether it's worth using the court system to recover the debt and your costs.

It's worthwhile including details of your right to claim late payment compensation in your correspondence with the debtor, and in any chasing telephone calls, as this might encourage them to pay up. Tell them how much the interest and compensation will be. Use it as a bargaining chip to get prompt payment.

You should also consider factoring your debts, a service which is offered by banks and independents such as Bibby Financial Services. This may, where appropriate, provide a solution to your cash flow difficulties. A usual deal will provide an advance of 70-85% of monthly invoices for a charge of 0.1-0.3%.

For advice on late payment of business contracts and dispute management contact Nigel Musgrove, Business and Litigation Solicitor on 01285 847001.

White Papers and Special Reports

Thu, 13 May 2010 14:09:48 GMT

Alongside our numerous articles on the legal issues that impact on businesses and our monthly ezine which provides legal updates, our lawyers write more detailed White Papers and Special Reports, tackling the topics we know SMEs want to hear about.

Special Report: Legitimate tactics for renegotiating your commercial lease

Some business owners assume that once they’ve signed a commercial lease that’s it, they are stuck with the terms. This causes all sorts of concern if they want to downsize, need more space or are struggling to keep up with regular lease payments.

Register to download our Special Report containing legitimate tactics you can use to renegotiate your lease.

The Definitive Guide to Solving Business Disputes

Containing tips from the experts on how to:

prevent and manage business disputes
minimise the costs of disputes when they occur
save on solicitors' fees

Find out more and get your FREE PDF copy of the Guide here.

Quick Guide to Buying Business Premises

With tips on:

Issues that may affect your ability to trade
What to look out for in the contract you are signing
Why a deal that looks too good to be true probably is

PLUS why your solicitor should inspect the premises with you.

Find out more and download a FREE PDF copy here.

Business Law Blog

Keep up to date with our thoughts on the latest legal and business news - follow our Blog.