Dispute resolution

We understand that sometimes everything does not go to plan and that sometimes it is necessary to preserve a working relationship with the other side. Therefore, we aim to achieve commercially acceptable solutions at a cost effective rate whether this be through mediation, alternative dispute resolution or through the Courts. We appreciate that each dispute is bespoke and as such we craft our strategies accordingly.

We appreciate that litigation can be costly and therefore we ensure at the outset that we agree a strategy with our clients which is one that is tailored to their needs.

We pride ourselves on being able to give our clients an indication of our likely fees at the outset of each matter and estimates for each stage of the matter. We explore with all of our clients whether their dispute is suitable for some form of litigation funding or alternatively whether they will be able to acquire some form of costs insurance.

Our experience includes, but is not limited to, the following:

  • Commercial disputes and breach of contracts;
  • Minority shareholder protection; and
  • Breach of warranties.

We understand that for the business litigation is an unwanted distraction as this takes key management personnel’s time away from focusing on the growth of the business. We aim to minimise the distraction by providing our personal service which will ensure that key personnel are only involved at the moment they need to be therefore ensuring that they are able to continue dedicating their time to the business.
Our clients have the benefit of knowing that they will receive a personal and proactive service in often complex and challenging litigation.

Should you need any dispute resolution legal advice then please contact us on 01274 924200 or email us at disputeresolution@bakerreign.co.uk and a member of our dispute resolution team will contact you.


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Commercial disputes and breach of contract

If there is a breach of contract or it is anticipated that there will be a potential breach of a contract one of the key issues is what remedies are available to the innocent party. These key remedies available are damages and equitable remedies.

Limitation

Before bringing any action for a breach of contract it is imperative to ascertain whether limitation has expired. If limitation has expired then you may be “statute barred” and you may therefore be unable to bring the claim.
Under section 5 of the Limitation Act 1980 (“LA 1980”) it states that for a breach of contract the claim must be brought no later than six years from the date under which the cause of action accrued.

Under section 5 of the LA 1980 the date of when the cause of action accrued is not when the damage was suffered but when the contract itself was actually breached.

Contractual damages

The purpose of damages is to compensate the innocent party for the actual loss that they have suffered. Therefore, the objective of an award of damages is to put the innocent part “so far as money can do it… in the same situation… as if the contract had been performed” (Robinson v Harman). It must be noted that this is different from that in tort where the aim there would be to put the innocent party in the position as if the tort had not occurred.

The recoverable damages for the innocent party fall into three main categories, namely:

  • Damages for pecuniary loss;
  • Damages for non-pecuniary loss; and
  • Nominal damages.

Limitations to recovery

There are however limits to that which can be recovered in damages. The amount of damages available can be influenced by a number of factors including:

  • Causation;
  • Remoteness; and
  • Mitigation of losses.

Causation

The liability of the party which caused the wrongful act or breached the contract are limited to the consequences of their actions. Therefore, there must be a causal connection between the breach and the losses suffered by the innocent party.

Only once causation has been ascertained should the innocent party then consider the damage suffered which is as a result of the breach caused. If there are damages which are considered remote, even if there is a causal link to them, they are likely to be unrecoverable.

Remoteness

There is a two-limb test to remoteness which was set down in the case of Hadley v Baxendale. These two limbs are to:

  • Identify the losses which arise naturally from the breach; and
  • Identify the losses which would have been within the reasonable contemplation of the parties should one breach the contract at the time of entering into the contract.

Mitigation

Consideration also needs to be given to the extent that the innocent party has mitigated their losses. Although there is no duty for the innocent party to mitigate their losses the extent of the damages recoverable will be reduced where it can be shown that the innocent party has failed to take steps to mitigate their losses. The innocent party is only required to act to a reasonable standard. It must be noted that the standard of reasonableness is not particularly high as the defaulting party is the wrongdoer. The innocent party may be entitled to recover any expenses incurred by mitigating their losses even when the resulting damage is higher than had they taken no steps to mitigate at all.

Equitable remedies

In not all circumstances will damages be an adequate remedy. Therefore, equitable remedies such as specific performance or an injunction may be awarded.

As the name suggests for specific performance, this if granted, would compel a party to perform their contractual obligation. It must be noted that this is a discretionary remedy available to the Court.
It may be the case that injunctive relief is given instead and this can be either mandatory or prohibitory. Mandatory injunctive relief would require the defaulting party to take certain actions. Whereas prohibitory injunctive relief would restrain the defaulting party from taking certain steps. Again, as is the case with specific performance, injunctive relief is a discretionary remedy.

With injunctions they can be made on either an interim basis or on a final basis.

Minority shareholder protection

Where a minority shareholder thinks that the company has or is being managed in a way which is “unfairly prejudicial” to some or all of its shareholders then they may be entitled to bring an action.

Unfair prejudice actions are open to any company however they are invariably brought forward by a minority shareholder who was expected to take part in the management of a company, for example as a director.

In addition to the Companies Act 2006 (“CA 2006”) setting out the rights of shareholders between themselves and with the company the articles of association need to be examined and consideration needs to be given to case law and other statutes.

The shareholders are entitled to pass certain resolutions, both ordinary and special resolutions. The resolutions, if passed with the required majority, would then be bound on dissenting shareholders which usually includes the minority shareholders.

A company is run by its directors for the benefit of its shareholders and is run in accordance with statute, including the CA 2006, along with the company’s articles of association. These determine the shareholders individual rights and also the corporate governance of the company. Ordinarily the minority shareholder has no right to challenge the decision of the directors or the majority shareholders. The rights of a minority shareholders are an exception to this and are based upon equitable principles. Due to this being an exception to the rule the availability of these types of claims and their success are limited.

Types of minority shareholder claims

There are three main types of minority shareholder claims, namely:

  • Unfair prejudice petition;
  • Petition for the just and equitable winding up of the company; and
  • Derivative claims.

Notwithstanding the three types of minority shareholder claims listed above a minority shareholder should always consider the unfair prejudice petition first.

Although each type of claim may seek a different remedy a common theme through all of them is that the minority shareholder obtains proper value for their shares.

Remedies to minority shareholder claims include the following:

  • In an unfair prejudice petition the order usually sought is that the majority shareholder purchase the shares of the minority shareholder;
  • If the petition is brought for the just and equitable winding up of the company then the order, if granted, would be that the company be wound up whilst solvent and that the net assets are distributed to the shareholders; and
  • If a derivative claim is brought then the enforcement of a claim against a director would then be vested in the company and therefore for the company’s benefit. This in turn would increase the value of the assets available.

Unfair prejudice petition (section 994 of the CA 2006)

This is a statutory remedy available for a minority shareholder who has been the victim of “unfairly prejudicial” conduct. Essentially the basis of the claim is that the affairs of the company have been or will be conducted in such a manner as to unfairly prejudice some or at least one of the company’s shareholders.

With regards to the remedies available for unfair prejudice the Court has a wide discretion. However, often the remedy sought is simply that the majority shareholder purchase the minority shareholder’s shares at a value determined by the Court. The value determined by the Court is typically the market value. It must be noted that this is not a claim made against the company, although the company is usually a party to such proceedings, and therefore the company should not fund the majority shareholders defence.

As a defence to an unfair prejudice petition it may be the case that at an early stage the majority shareholders make a reasonable offer to purchase the minority shareholders shares.

Just and equitable winding up

This is also a statutory remedy provided by section 125 of the Insolvency Act 1986 (“IA 1986”). This remedy is available to a shareholder who can show that on a winding up there would be a substantial surplus. This effectively means that this is not an insolvency process.

The circumstances under which the Court will order that the company be wound up are those which would be determined within an unfair prejudice application. However, unlike an unfair prejudice application where the Court has wide discretion, here the only available option to the Court would be to grant the winding up. Therefore, in terms of obtaining a tactical advantage in pursuing a winding up of the company it is limited.

Again, as is the case with the petition for unfair prejudice the application is not against the company and therefore company monies should not be used to claim or defend the application.

Derivative claim

Again, this is a statutory remedy available to shareholders pursuant to sections 260 to 264 (inclusive) of the CA 2006. It is effectively a claim brought by a shareholder for the benefit of the company. The claim must involve negligence, default, breach of duty or breach of trust by a director of the company.

As soon as the derivative claim has been issued permission must be sought from the Court by the shareholder to continue with the claim. If the Court determines that the claim is not in the interests of the company or that the conduct complained of has been validly authorised then the Court may dismiss the application and not grant permission to proceed with the claim. There are a number of factors that the Court will take into consideration when determining whether or not to allow the claim to proceed.

If, however, the Court does grant permission to continue with the claim then it is likely to be limited to specific further steps and ensuring that the shareholder seeks further permission to continue with the claim.

As is the case with an unfair prejudice petition and with an application for the just and equitable winding up of the company a derivative claim is not a claim against the company as such notwithstanding that it will be a defendant to the claim.

As the shareholder would be bringing the claim on behalf of the company they may seek an order that the company indemnify them against the cost of bringing the derivative action. It is likely that this would be granted in the event that permission to bring the claim was granted by the Court. However it may be limited in both the amount and scope.

It may be the case that the derivative claim has different characteristics than those needed to bring an action and therefore relief may be available by virtue of an unfair prejudice petition pursuant to section 996 (2) (c) of the CA 2006.

Derivative actions are usually brought when the petitioner does not want the other shareholders to purchase their shares or for some reason this remedy is unavailable.

Breach of warranties

In a corporate transaction the buyer will provide warranties in the asset or share sale agreement. A warranty is a statement of fact and these are negotiated upon.

The warranties are usually qualified by the seller by them stating that the warranty is “as far as the seller is aware” or “to the best of the seller’s knowledge, information and belief”. Should the seller wish to disclose against any warranties that are not correct then they would usually do this in the form of a disclosure letter. They would then set out the reasons, along with any documents, as to why the warranty was incorrect. Therefore the warranty within the asset or share sale agreement would be correct “save as disclosed” within the disclosure letter. What constitutes disclosure for the purpose of the disclosure is usually contained and defined within the asset or sale agreement.

Breach of warranties

If the warranty is incorrect and has not been disclosed against then the buyer may be able to bring a claim for breach of warranty. The objective for a breach of warranty claim is to compensate the buyer for their loss of bargain and by putting the buyer in the position they would have been should the warranty have been true. The link between the breach and the loss must also not be too remote. The buyer is under a duty to take reasonable steps to mitigate their losses. It may be the case that expert evidence is required to quantify the losses and therefore the amount of damages. Ordinarily the method for dealing with breach of warranty claims is dealt with within the asset or share sale agreement. This also usually deals with the formula for calculating damages.

Some of the warranties provided by the seller require them to warrant and represent that such warranties provided are true and accurate. The reason behind this is because:

  • Damages for a breach of warranty would usually be the difference between the market value of the business had the warranty been true and the actual market value; or
  • Damages for misrepresentation would be the difference between the price paid in reliance upon the warranty, which turned out to be misrepresented, and the true market value of the business.

By having the seller warrant and represent that the warranty is true this enables the buyer to choose whichever claim gives the higher value.