Legal News

Coleman’s Solicitors Recent Legal News A selection of recent legal news that company Directors should be aware of.

Robert Willox 12/23/2010

Ambiguous terms in insurance – when wrong is right

Insurers often try to give themselves ‘wiggle room’ to contest claims, which is one reason why they put so many questions in proposal forms. Over the years, the courts have established that where such a question is ambiguous, the legal construction put on it (what it means in law) will be taken as being what a reasonable person would understand by the question.

Recently, a case amplified this principle, when the court decided that the subjective understanding of the insured was irrelevant if the objective construction of an ambiguous question could be deduced from the wording.

In the case in point, the directors of the insured company answered ‘no’ to a question about whether the company or its directors or partners had, either personally or in connection with any business in which they had been involved, been the subject of insolvency proceedings or made bankrupt.

One of the directors was associated with companies which had been placed in administrative receivership or which had been the subject of a creditors’ voluntary liquidation.

The court ruled that the ‘no’ answer in the proposal was correct – the question was intended to deal only with the company plus its directors and partners and was not concerned with companies associated with a director.

What is surprising is that the court went on to say that the insured’s own subjective interpretation of the question in the proposal form is not relevant – what matters is how the question should be construed objectively. Therefore, where the insured answers such a question incorrectly, provided that the question is ambiguous, it could be construed against the insurer.

No doubt insurance companies will be reviewing the questions on their proposal forms in the light of this decision.

Can you justify your service­related pay scheme?

The Court of Appeal has ruled (Wilson v Health and Safety Executive) on the correct approach to objective justification in equal pay claims that arise from service­related pay schemes which have a disparate impact on women compared with men.

Mrs Wilson worked for the Health and Safety Executive (HSE) as a health and safety inspector. She claimed that the somewhat complex pay system operated by the HSE, which determined pay in part by reference to length of service, constituted a breach of the Equal Pay Act 1970. She accepted that the nature of the job was such that performance would be likely to improve with experience for the first few years, but she did not believe that the HSE was justified in applying this criterion over a ten­year period.

In a similar case (Cadman v HSE), the European Court of Justice (ECJ) found that as a general rule the criterion of length of service is appropriate to attain the legitimate objective of rewarding experience acquired which enables the worker to perform his or her duties better.

An employer does not generally have to produce specific proof in order to justify the practice unless a worker provides evidence ‘capable of raising serious doubts’ in the minds of the Employment Tribunal (ET) as to whether the link between pay and length of service is in fact rewarding experience that enables the worker to perform better. In that case, the employer must demonstrate the absence of unlawful discrimination.

Following on from this judgment, the Court of Appeal in Wilson v HSE held that an employer can be required to provide objective justification for the way a service­related criterion as a determinant of pay is used, as well as for its adoption in the first place. The circumstances in which this would be necessary – i.e. when the burden of proof switches to the employer to show that use of the length of service criterion is appropriate – are when the employee shows that there is evidence from which, if established at trial, it can properly be found that the general rule in Cadman does not apply. It is not enough that the evidence is capable of raising serious doubts. It must establish a basis for inferring that the adoption or use of the length of service criterion is disproportionate. In Lady Justice Arden’s view, the ECJ in

Cadman was putting forward the ‘serious doubts’ test as a ‘filter on claims’, a preliminary test which still left the issues to be decided by the ET. As such, the requirement of ‘serious doubts’ is merely the counterpart of a length of service pay criterion not requiring justification in the usual case.

In the Court’s view, Mrs Wilson had fulfilled the serious doubts test and, on the ET’s findings in this case, her appeal was upheld.

The Court went on to say that even if it was wrong about the effect of the decision in Cadman, in domestic law the Equal Pay Act 1970 and the Sex Discrimination Act 1975 interpreted together place the burden of showing objective justification, including proportionality, on the employer and neither Act contains any exception for the length of service criterion.

If you are concerned that the effects of your pay scheme could be discriminatory, contact Sue Jones for advice on ensuring that it complies with the law.

Companies Act changes – purchase of own shares

There has been confusion about some of the changes in company law brought in by the Companies Act 2006, which was fully implemented on 1 October 2009. One of the more beneficial changes for companies wishing to reorganise their share capital (perhaps because a founder shareholder is nearing retirement or to facilitate new investment) is the ability of companies limited by shares to purchase their own shares unless there is any specific restriction on or prohibition of this in their articles. This is a great benefit to companies, as a purchase of own shares can often be an efficient way to buy out the interest of a shareholder without requiring other shareholders to find substantial sums from their own pockets in order to finance it.

One of the less well­publicised aspects of this procedure can be found in Section 702 of the Act, which should be read by anyone considering a purchase of own shares. This makes it compulsory (for a period of ten years from the date of the transaction) to make available to any member of the public who requests them the details of any purchase of shares by the company, and makes it a criminal offence for access to this information to be refused. It is also a criminal offence (Section 658) for a company to acquire its own shares improperly.

Says Sue Jones, “We would expect the use of purchase of own shares to become more frequent and the issue of redeemable shares to become more common when companies are set up, to allow greater flexibility of exit routes for founder shareholders.”

To bring your company’s articles up to date or discuss any company law or reorganisation issue, contact us.