Question 1

What remedies are available for breach of contract?

Accepted Answer

The main remedies available for breach of contract are usually termination of the contract, damages, injunction or specific performance.   However, it is important to review the contract itself in each situation as the parties may have agreed in the contract to amend the common law remedies available.   For example, we often see liquidated damages provisions (where damages for breach are capped at a specific amount), specific indemnities, limits on bringing a claim and early termination provisions.

Question 2

When is a contract formed?

Accepted Answer

A contract is formed when five key elements have occurred. These key elements are: offer, acceptance, consideration, intention to create legal relations and certainty of terms.   A contract does not need to be in writing and can be formed by oral agreement. It is important for business owners to be careful not to inadvertently create an enforceable contract accidentally and prematurely for example by their external behaviour.

Question 3

Can I delay payment under a contract?

Accepted Answer

You cannot delay payment if you have a contractual obligation to make a specified payment at a specified time to a specified entity. Late payments will attract interest and can cause issues for the payee such as reducing their cash flow.   If a payment isn’t made on time then the payee may be able to terminate the contract and make a claim for damages (especially if “time is of the essence” for payments). Don’t delay making a payment!

Question 4

Does a written contract need to be signed to be effective?

Accepted Answer

Some contracts must be in writing and properly executed to be effective eg for the sale of land.  Contracts can be verbal or in writing provided that there is an offer, acceptance of the offer, consideration (usually a payment), certainty, and the intention to create legal relations.  An unsigned written contract may be evidence of the intentions of the parties but this will be decided by a Court.

Question 5

Does an oral agreement constitute a binding contract?

Accepted Answer

You can have an oral contract that is legally binding provided that it complies with the requirements to create a legally binding contract namely, that there is an offer, acceptance of the offer, consideration (usually a payment), certainty, and the intention to create legal relations.   However, the problem with oral contracts is that there is usually no evidence of it.  Oral contracts are likely to cause problems such that it is always better to have a written contract.

Question 6

What are ‘express’ and ‘implied’ terms?

Accepted Answer

An express term in a contract is one that is written into an agreement or that is made clear orally (don’t forget there is such a thing as an oral contract).   An implied term is one that is usually implied by legislation (usually to protect consumers) or custom and practice. Some implied terms can be excluded if that is done as an express term.   Some implied terms cannot be excluded (especially in consumer contracts), eg a seller owns the goods they are selling and damages for death or personal injury.

Question 7

What can I do if someone’s not paying me for work I’ve done/products I’ve supplied?

Accepted Answer

Take proceedings to recover the price or to recover the product supplied or to stop the customer from using it. In a well-drafted set of sale terms, there is usually a retention of title (ROT) clause which states that ownership won’t pass until the product is paid for. You can have a similar term for services such as marketing or design material, ie you retain your copyright in the material until payment.

Question 8

What constitutes ‘offer and ‘acceptance’?

Accepted Answer

A contract is made when various elements come into existence and those main elements are: offer, acceptance, consideration, intention to create legal relations and certainty of terms. Don’t forget that all of these elements can be present in a conversation(s) hence the fact that oral contracts can be entered into. An offer is a promise by one party to enter into a contract on certain terms. The offer has to be: specific, complete, capable of acceptance and made with the intention of being bound by acceptance (ie an offer is not just a social invitation or an indication that somebody is will to discuss a matter – an invitation to treat).  Acceptance is what needs to happen when an offer is made and can either be confirmed orally, in writing or by conduct.  Distinctions have been made between parties agreeing on a course of action via a memorandum of understanding (which is subject to agreeing a contract) and one of the parties claiming that acceptance of a contract was made when they carried out the terms of the memorandum. The court decided that the memorandum had to be converted into a contract before it became an offer that could be accepted.  Acceptance has no effect until it is communicated and there are well-tried and tested rules about communicating acceptance (ie the reception and postal rules). Basically, you need to do all you can to ensure that you have got your acceptance to the other party preferably in writing, for evidential reasons.

Question 9

What happens when a contract has an illegal purpose or violates public policy?

Accepted Answer

As a general rule, a contract which is illegal will be unenforceable. The law on this is not simple and the courts have been considering issues regarding illegal contracts for years. If a claim is brought to enforce a contract, the courts can refuse the claim on the basis that it arises from illegal or immoral conduct without either party raising this as a defence.  Depending on the nature of the problem and how much of the contract is affected, in order to avoid the whole contract becoming unenforceable, if the offending part relates to public policy, it may be possible to sever that part of the contract and enforce the rest.  If the unenforceable provision can be removed without the need to add to or modify the remaining aspects, the remaining terms continue to be supported by adequate consideration (e.g. money) and the removal of the unenforceable provision does not materially change the character of the contract making it different to the contract entered into, then the remainder of the contract will continue and can be relied on.

Question 10

What is the difference between a ‘condition’ and a ‘warranty’?

Accepted Answer

A warranty is a promise within a contract. A breach of warranty may give rise to a claim for damages. A condition is a term of a contract and it is of vital importance, to the root of the contract. Therefore, it is a major term of the contract, and a breach of a condition will give the claimant the right to terminate the contract and claim damages for any loss.

Question 11

What is a ‘retention of title’ (ROT) clause?

Accepted Answer

Essentially, this clause ensures that ownership of the goods is retained by the seller until it has received full payment for the goods. If you are looking to retain ownership (and for most sales that is the only security you get for payment) then you need to have a well-drafted clause in your contract.  The provisions which are needed to make the clause effective are as follows:  the clause to be effective if any money is owed to the seller (i.e. an all monies clause); and rights for: the seller to repossess the goods, to prevent the buyer from selling or using the goods and to enter the buyer’s premises in order to repossess the goods.  You can also include an obligation on the buyer to: store the seller’s goods separately from goods belonging to third parties, mark them as the seller’s property and allow the seller access to the buyer’s premises to verify that this has been done. This will enable the seller to easily identify its own goods if repossession is necessary and avoid any mixing of, and therefore uncertainty over, ownership of the goods.  Of the above, the most important in practice is the all monies clause, i.e. the seller simply has to show that money is owed to them by way of unpaid invoices and they don’t have to identify which specific product hasn’t been paid for.

Question 12

What is an ‘entire agreement’ clause?

Accepted Answer

An entire agreement clause is a clause that commonly appears in most contracts. The purpose of an entire agreement clause is to prevent statements or representations that are not within the contract or agreement from having any contractual force.

Question 13

What happens when there is a mistake in creating a contract?

Accepted Answer

This is another area that is not particularly straightforward. Generally, the parties are held to the terms of the contract they have made, regardless of whether they have misunderstood the contract wording, its legal effect, their rights or the commercial benefits of entering the agreement. It is each party’s responsibility to satisfy itself on all these points before agreeing to a contract.  In the absence of special circumstances, if a mistake has been made, the only option is to hope the counterparty will agree to amend or renegotiate the contract. However, there is no requirement on a party to do this, it is therefore always best to make sure you get the agreement right first time around.  If, however, one party misleads the other, the contract may be valid but voidable i.e. the injured party may set the contract aside if it acts quickly enough and they may also be able to bring a claim for damages.  In some cases, the courts will correct a mistake in a contract to bring its express terms in line with what they understand to have been the parties’ intentions.  In extreme cases, a mistake may prevent the formation of a valid contract i.e. the mistake may negate the agreement or render it too uncertain to enforce. Potentially, if none of the previous solutions apply and the right conditions are met, the contract may be void for mistake at common law.  The most important thing to remember if you are trying to get a contract set aside due to a mistake is that you need to act quickly. Delaying may mean that the right to set aside a voidable contract is lost. You can also lose this right by continuing to perform and demand performance under the contract.

Question 14

What is the time limit for bringing a contractual claim?

Accepted Answer

The Limitation Act 1960 sets out the limitation periods for different types of claims, for bringing a contract claim it is six years and this begins from the date of the breach of contract.  If you have a question regarding Commercial Law or would like more information on the services we offer, Talk to Tollers. Our experienced Corporate and Commercial teams are on hand to provide you with the best possible advice and guidance.

Question 15

Do I have to re-assign my copyright if I publish?

Accepted Answer

Yes, most publisher will require that copyrights are re-assigned to them before publishing your works. Whether you will be under any obligation to assign (or re-assign) copyright that is vested in you in any particular situation will depend on the specific circumstances, possibly contractual.

Question 16

How do I protect my business ideas?

Accepted Answer

Business ideas are automatically protected under UK copyrights law if they are original and tangible. This means you have to come up with an idea that has never been thought of before, and you need to have physically expressed it – it can’t be just an idea in your head.

Question 17

How do I transfer my IP from one company to another?

Accepted Answer

Generally, this is done through an IP assignment agreement. To be legally binding, the assignment must clearly identify the IP being assigned, be in writing and be signed by the assignor. There must also be some consideration for the assignment. This could be £1.00 or the full value of the rights.

Question 18

What are the main types of trademarks?

Accepted Answer

Registered and unregistered.   Registered trademarks are those registered with the Trade Mark Registry and there is a cost for such registration. You can register yourself https://www.gov.uk/government/organisations/intellectual-property-office or use an advisor (e.g. a trademark attorney). Greater protection for a trade mark is provided by registration and enforcement action is much more straightforward.

Question 19

What are the requirements to register a patent?

Accepted Answer

Obtaining a patent is a complex, costly and lengthy process.  The core features you will be required to demonstrate in order to show that you have a registrable patent are: a new (must not have been made publicly available anywhere in the world), inventive (it cannot be an obvious change to something that already exists) step consisting of something that can be made and used, a technical process, or a method of doing something.    Our recommendation is to use a patent attorney as they will assess the suitability of your invention (including searching any existing similar inventions) to obtain registration and help you complete the registration process. The registration of a patent is through the Intellectual Property Office (IPO) Intellectual Property Office - GOV.UK (www.gov.uk)   There are different stages that your application will go through: filing the application, the search against the other patents and a substantial examination. The fees for the different stages can be found at Apply for a patent: File your initial application - GOV.UK (www.gov.uk)

Question 20

What are the requirements to register a trade mark?

Accepted Answer

A trade mark is used to protect a product brand or service and can consist of a logo, colour, sound or word (or a combination of these).   The core features you will be required to demonstrate in order to show that you have a registrable trade mark are: your trade mark does not infringe another registered mark, is not offensive, does not simply describe the goods or services, is not misleading and is not too common and non-distinctive.   Our recommendation is to use a trade mark attorney as they will assess the suitability of your trade mark (including searching any existing similar marks) to obtain registration and help you complete the registration process. The registration of a trade mark is through the Intellectual Property Office (IPO) Intellectual Property Office - GOV.UK (www.gov.uk)   There are fees and a process for registration and those details can be found at  Register a trade mark : Send your application - GOV.UK (www.gov.uk)

Question 21

If we develop an idea with a company or academic partner, who owns the intellectual property?

Accepted Answer

If the development is carried out by way of a consultancy arrangement then the IP belongs to the author or inventor of the material or process (i.e. that would usually be the consultant). Normally, however, such arrangements are subject to terms that transfer any Intellectual Property Rights from the consultant to the customer/client subject to payment. Consequently, you must carefully consider any such agreements and/or make it clear how you want the ownership of the IP dealt with and/or paid for.

Question 22

What are the benefits of a patent?

Accepted Answer

You can stop any other parties from carrying out a process that is subject to your patent. However, Intellectual Property litigation is expensive and you would need to ensure that you either have the resources or insurance to carry out any enforcement action. However, most litigation is settled following the sending of a written ‘cease and desist’ demand.   The disadvantage of registering a patent is that the patent becomes a matter of public record and that is why, therefore, some inventors choose not to register their patent.

Question 23

What are the benefits of having a registered trademark?

Accepted Answer

You can stop any other parties from using your trademark or a mark similar to your trademark. The claim would be by way of trademark infringement. If you do not register the trademark then the claim is reduced to passing off action and that is a more difficult claim to enforce. However, IP litigation is expensive and you would need to ensure that you either have the resources or insurance to carry out any enforcement action. However, most litigation is settled following the sending of a written ‘cease and desist’ demand.   It’s a criminal offence to describe an unregistered trademark ™ as a registered trademark ®.

Question 24

What is the difference between copyright and intellectual property rights?

Accepted Answer

Copyright is a form of Intellectual Property Rights (IPR). IPR is a generic description of all forms of non-tangible property consisting of registered intellectual property (e.g. patents, trademarks and design rights) and unregistered intellectual property (e.g. copyright and unregistered design rights). Therefore, copyright is a subset of rights within the general umbrella of IPR.

Question 25

How long does a patent last?

Accepted Answer

Patents last for 20 years which starts on the date that your application is filed and the registration protection is subject to the paying of renewal fees.

Question 26

How long does a trademark last?

Accepted Answer

The registration of a trade mark can last for 10 years subject to payment of fees and can also be renewed every 10 years.

Question 27

What is a patent?

Accepted Answer

The core features of a patent are that it is a new (must not have been made publicly available anywhere in the world), inventive (it cannot be an obvious change to something that already exists) step consisting of something that can be made and used, a technical process, or a method of doing something.

Question 28

What is a trademark?

Accepted Answer

The core features of a trade mark are that it is a mark that is applied to goods or services and can consist of a logo, colour, sound or word (or a combination of these) that does not infringe another registered mark, is not offensive, does not simply describe the goods or services, is not misleading and is not too common and non-distinctive.

Question 29

Am I liable if I sell items that infringe on a copyright in my consignment shop?

Accepted Answer

Yes, you could be liable although this is a complex issue.  Under the Copyright, Designs and Patents Act 1988, the owner of the copyright in a work has the exclusive right to do specific acts.  Under s.23 of the Act, the copyright in a work is infringed by a person who, without the licence of the copyright owner, sells an article which is, and which he knows or has reason to believe is, an infringing copy of the work.

Question 30

Can intellectual property rights be sold?

Accepted Answer

Yes, intellectual property rights can be sold. However, there are issues to consider when selling intellectual property rights.  There are basically two different types of intellectual property rights, registered and unregistered and they have different transfer requirements and so it is imperative that you ensure that the requirements for the particular IPR is met.

Question 31

What happens if I breach a non-disclosure or confidentiality agreement (NDA) and disclose the information to a third party?

Accepted Answer

In the event that you breach an NDA and disclose the information to a third party, then it is likely that the other party to the agreement will be able to claim damages.  However, damages alone may not be an adequate remedy for a breach of this nature and the  other party may  also be entitled to the remedies of injunction, specific performance, or other equitable relief, which may be sought from the party who breached the NDA or from the third party to whom the confidential information was disclosed, even where that third party had no knowledge of its confidential nature.

Question 32

What should my business's data protection policy cover?

Accepted Answer

Internal data protection policies (DDP) should set out the principles and legal conditions that organisations must satisfy when obtaining, handling, processing, transporting or storing personal data in the course of their operations and activities, including customer, supplier and employee data. This should provide a clear guide for employees so they know how to handle and process data in compliance with the law.  The six key privacy principles to be set out in the DPP are as follows: (1) Lawfulness, fairness and transparency - personal data must be processed lawfully, fairly and in a transparent manner in relation to the data subject; (2)  Purpose limitation – there must be a specified, explicit and legitimate purpose for which personal data is collected; (3) Data minimisation – only essential personal data which is relevant to the purpose for which the information is processed can be collected and stored; (4) Accuracy - personal data must be accurate and kept up to date. Any incorrect data must be updated or deleted without delay; (5) Storage limitation - personal data which allows an individual to be identified must only be kept for as long as is necessary for the purposes for which the data is processed; and (6) Integrity and confidentiality – measures should be put in place to protect any data held to ensure that it is kept confidential and is not at risk of being seen or used by anyone who is not authorised to process the data.   There is also an accountability principle which should also be covered. This will deal with what data the controller is responsible for and demonstrate how it is in compliance with the data protection principles (e.g. that there is an appointed data protection officer, regular training is to be carried out by employees etc.).  The grounds for processing data should also be covered in the DPP. There are six grounds for which data can be lawfully processed (1) consent from the data subject, (2) that it is necessary in connection with a contract; (3) it is necessary to comply with legal obligation to which the controller is subject, (4) to protect the vital interests of the data subject or another person, (5) the processing is necessary for the performance of a task carried out in the public interest or in the exercise of official authority vested in the controller, or (6) the processing is necessary for the purposes of the legitimate interests pursued by the controller. The policy should set out what is required to satisfy the relevant grounds which the company is seeking to rely on and ensure this process is followed in order to reduce the risk of there being any data protection breaches.

Question 33

When do you need a solicitor for specialised data protection legal advice?

Accepted Answer

There will be certain things which you will be able to deal with internally such as compliance on a day to day basis with your data protection policies. However, this is an area of law for which it would always be best practice to get an opinion or to take advice on any matters which you are unsure or concerned about. Please note, that the Information Commissioners Office (ICO- ico.org.uk) has a very useful information service and although they do provide a “policing” function as the UK data protection authority they are very concerned about prevention. Consequently, they are very approachable.  When it comes to matters such as subject access requests (SAR) you need to seek legal advice as soon as possible. There is a strict time limit of one month of receipt in which the request must be dealt with and there are penalties for non-compliance within this time period. However, even more importantly, you could be investigated by the ICO. Most businesses run into problems with respect to SARs because they simply ignore them.

Question 34

What are the main principles of GDPR?

Accepted Answer

The UK GDPR sets out seven key principles which should be considered when processing personal data.  These key principles are as follows: (1) lawfulness, fairness and transparency, (2) purpose limitation, (3) data minimisation, (4) accuracy, (5) storage limitation, (6) integrity and confidentiality (security) and (7) accountability.

Question 35

What are the requirements for organisations to keep data secure?

Accepted Answer

One of the key principles of GDPR is to process personal data securely by means of ‘appropriate technical and organisational measures’.  An organisation should consider aspects such as risk analysis, organisational policies and physical and technical measures in order to comply with this requirement.  An organisation will also need to take into account additional requirements about the security of its processing which also apply to data processors.

Question 36

Does my business need to have a Data Protection Officer (DPO)?

Accepted Answer

If you are not a public authority or body, do you monitor individuals on a large scale (eg  tracking an individual’s behaviour on the internet or on CCTV), do you not process as your core activities  “special categories” of personal data (eg racial or ethnic origin) or criminal convictions or offences data then you don’t need to appoint a DPO. You can do that voluntarily but you must register the individual with the Information Commissioner’s Office (ICO) and the DPO does have to take on a high level of responsibility. Having said that, you should have somebody in the organisation that is responsible for data protection.  Do access the ICO’s website(ico.org.uk) for a variety of very helpful information including guidance for DPOs.

Question 37

How does data protection apply during a business sale or business transfer?

Accepted Answer

Both the buyer and the seller need to fully understand what personal data is used by the seller, how that is processed within the business and who that data is supplied to. There also needs to be a high level of understanding regarding the sellers data protection compliance and that can range from registration with the ICO to practices and procedures (eg privacy statements) and awareness and methodology for dealing with subject access requests (SARs). Data protection continues to be a substantial element in transaction work and ignore that element of the deal can be very costly.

Question 38

How should my business handle data protection for deceased individuals?

Accepted Answer

Data protection legislation only applies to an identifiable living individual. However, it is good practice to only maintain personal data records for a reasonable period. If a person dies the organisation holding the records should consider whether their information continues to be relevant and should be retained. There are also specific rules under the Freedom of Information Act 2000, Environmental Information Regulations 2004 and Access to Health Records legislation.

Question 39

Can a data protection officer (DPO) be prosecuted?

Accepted Answer

In short, a DPO cannot be prosecuted merely for failing to perform the ascribed role of a DPO. There is the possibility of a potential civil claim or breach of employment contract but there is no statutory criminal penalty against a DPO.  For example, there are some obligations placed on the DPO such as compliance with secrecy and confidentiality, and there is a requirement to comply with the terms of their employment contract.  It is worth noting that organisations are forbidden from dismissing or penalising a DPO in connection with the performance of their role as DPO (Article 38(3), UK GDPR).

Question 40

Can I rely on a 'soft opt-in' for marketing under UK data protection laws?

Accepted Answer

‘The soft opt-in’ is a term used for where an organisation sends marketing emails or texts using customer data they gathered when that customer bought or expressed interest in their products or services. There are certain criteria which need to be met to rely on the soft opt-in.  You can only use the soft opt-in when you're sending marketing emails or texts to offer similar goods or services.  The soft opt-in can only be used when you’re selling something or negotiating to sell something (source ICO).

Question 41

What happens if your business breaches data protection law?

Accepted Answer

The Data Protection Act 2018 provides for maximum fines of up to £17.5 million or 4% of the undertaking’s total annual worldwide turnover, in addition to fines, there may also be criminal offences.

Question 42

What is the law on data protection for businesses?

Accepted Answer

The law on data protection for organisations is The Data Protection Act 2018.  As a result of Brexit, the UK stopped being a part of the EU and therefore the EU General Data Protection Regulation (‘EU GDPR’) cease to be applicable.  The provisions of the EU GDPR has been incorporated directly into UK law as the UK General Data Protection Regulation (‘UK GDPR’).  The UK GDPR sits alongside The Data Protection Act 2018. The rules on data protection must be followed if your business stores or uses personal information. The main data protection rules are set out in the UK GDPR. The UK GDPR set out seven key principles:   Lawfulness, fairness and transparency  Purpose limitation  Data minimisation  Accuracy Storage limitation  Integrity and confidentiality (security)   Accountability

Question 43

What is a distributor?

Accepted Answer

A distributor purchases goods from manufacturers or other suppliers and resells them to others in the supply chain, such as resellers and consumers also known as end-users.  Distributors also often provide services for the manufacturer, such as product marketing and post-sale support services. In other words, the distributor facilitates and often acts as a ‘middle man’ for a manufacturer to sell their goods to retailers. The Retailer then sells the goods to consumers for profit.

Question 44

What is an agent?

Accepted Answer

The Regulations define a commercial agent as "an independent agent who is continuously authorised to negotiate the sale or purchase of goods on behalf of a principal, or to negotiate and carry out such transactions on behalf of a principal" is defined as a commercial agent. The UK commercial agents are regulated and subject to the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053).

Question 45

How can I protect my intellectual property and confidential information when working with an agent or distributor?

Accepted Answer

The most common way to protect your intellectual property rights (IPRs) and confidential information is through an express confidentiality and intellectual property protection clause in the contract.  This clause can provide that on termination of the contract that all confidential information is deleted, destroyed or returned.  If the IPRs or information is particularly sensitive, then you should not make it available in the first place.  Once IPRs or information has been made available to another party then there is a higher risk of it being used by someone else or being released into the public arena.  The contractual arrangements can be more complex if needed – speak to your lawyer about this.

Question 46

What are the key elements of a distribution agreement?

Accepted Answer

There are a number of key issues that need to be included in a distribution agreement including exclusivity, term, the product(s), price, delivery, and the relevant territory.  The termination process is also important as a distributor could be holding a large quantity of high value products and there may be the temptation to dump it onto the market which could damage the brand and impact future sales, such that a right to buy back unsold stock at the end of a contract is important.  In addition, the manufacturer may want to take over established distribution channels.  Other issues to consider include whether there are key performance indicators and after-sales servicing.  It should be remembered that a distributor is usually a reseller of the products such that title to the goods usually passes to the distributor which then sells on to the customers, and ongoing obligations between the distributor and the customers remain in place after the sale.

Question 47

What are the key elements of a sales agency agreements?

Accepted Answer

A sales agent usually has the right to negotiate contracts on behalf of the principal.  The legally binding contract is then entered into between the customer and the principal although sometimes the agent can be given authority to enter into legally binding contracts on behalf of the principal.  The agent receives a commission for the sales. The contract will set out the various obligations of the parties including such issues as the agent’s sales targets, the rate of commission, the obligation of the principal for the goods, and the fact that the agent will not have any obligations to the customer (eg including ongoing obligations such as after sales services).

Question 48

What restrictions are there on terminating a distribution agreement?

Accepted Answer

The restrictions on terminating a distribution agreement will depend on the terms of the agreement. You should consider if there is a termination process set out in the agreement which must be followed and be cautious of the governing law of the agreement. As many distribution agreements deal with territories in different countries you could find that the jurisdiction governing the agreement takes a more favourable view of the distributor and affords protections to them even if the supplier has otherwise complied with the terms of the agreement.  Depending on the type of distribution agreement, there will often be a provision which allows a supplier to terminate the agreement if a minimum sales quota has not been reached. This is particularly important when an exclusive or sole distribution agreement has been used as it creates flexibility for the supplier to terminate the contract and appoint a new distributor in order to maximise the selling potential. This can also be linked to the status of the distributor rather than the termination of the agreement (i.e. a distributor will lose their exclusive or sole rights meaning the supplier can appoint other distributors where they could not before).  When looking to terminate any contract you need to make sure that the terms of the agreement have been followed. Normally this will include a notice period of a number of months which must be given by a party, or the contract could be terminated immediately if one of the matters specified in the agreement takes place. This usually includes things like a material breach of the contract, non-payment, one of the companies going into liquidation etc. It is important to satisfy yourself when entering into a distribution agreement what the termination provisions are so you are clear how and when the agreement can be terminated.

Question 49

What type of distribution agreements exist?

Accepted Answer

There are three types of distribution agreement: (1) sole; (2) exclusive and (3) non-exclusive.  Sole – this is where a supplier appoints a single distributor for a specific territory with the supplier reserving the right to sell directly to customers in that territory. This allows the supplier to continue to take advantage of any potential sales directly with customers whilst providing a level of exclusivity to the distributor.  Exclusive  – this is where a supplier agrees to sell products to one distributor only within a set territory and agrees not to sell to any other distributor, or to any customers directly in that territory.   Non - exclusive  – this arrangement allows a supplier to sell products to any number of distributors within a set territory and they can also sell directly to customers. This type of distribution arrangement is less onerous on the distributor as they will be competing with other distributors appointed in the territory and with the supplier.

Question 50

What is the difference between agency and distribution?

Accepted Answer

The essential difference is that a distributor contracts with its customers in it’s own right and an agent contracts with customers on behalf of the individual or organisation that has appointed it (ie the principal). That means that the distributor is responsible to it’s customers for the products/services it sells whereas the principal is responsible to customers for the products/services the agent markets or sells.   The distributor should at all times be independent of the business whose products/services it is distributing whereas an agent is part of the principal’s business to the extent that the concern of the principal is to limit the authority of the agent.   A distributor’s relationship is governed by the terms of its distributor agreement (and there should always be an agreement in writing) and contract law (NB exclusive distributor legislation and distribution competition law). The agent’s relationship is governed by the terms of its agency agreement (and there should always be an agreement in writing) and agency law (NB Commercial Agents Regulations).

Question 51

What type of agency agreements exist?

Accepted Answer

An agency agreement would normally be for marketing or sales or for both. That is to say the agent either simply markets the product/services or sells the product/services on behalf of the principal or both markets and sells the products/services on behalf of the principal.  The agreement can be exclusive or non-exclusive for specific territories and/or markets. An agent that assumes the most responsibility for sales (and usually receives the highest commission) is a del credere agent. They assume the credit risk for sales (i.e., they guarantee to the principal the debts of the customers the agent sells to).

Question 52

Are shareholder agreements public?

Accepted Answer

Shareholder Agreements are private contracts between the shareholders, and it usually has the company as a party to ensure that the company is also bound by it.  It is not a public document and it does not need to be registered anywhere.  The agreement is only between the parties to the contract and does not bind third parties.

Question 53

Can I sell my company shares to anyone?

Accepted Answer

Usually yes, you can sell to anyone.  However, there might be pre-emption rights (or other qualifications) in a company’s Articles or in a Shareholders Agreement, that require you to offer them first to someone else (usually existing shareholders).  The issue of new shares is a separate subject and pre-emption rights may apply.

Question 54

Can shareholder agreements be used for trusts, partnerships or other arrangements?

Accepted Answer

A Shareholders Agreement is usually only used by shareholders to regulate the relationship between themselves, and between the shareholders and the company.  A trust or a partnership that owns shares in a company can be a party to a Shareholders Agreement.  Shareholders Agreement are only used in relation to the shareholders holding shares as there are other documents that are used in relation to trusts (trust deed) and partnerships (partnership deed).

Question 55

Can you change the terms of a Shareholder Agreement?

Accepted Answer

Yes, however, you need the agreement of all the parties.  A change to a Shareholders Agreement can be achieved either through a variation agreement or by amending the Shareholders Agreement and then re-executing it.

Question 56

What is a minority shareholder of a company?

Accepted Answer

A minority shareholder is an individual/corporate entity who owns less than 50% of shares in a company. A minority shareholder may exercise some influence in the decisions and direction of the company, but ultimately, this decision will be with the majority shareholder. The most common way of protecting a minority shareholder, if they are to have some influence in the running of the company, is by way of a shareholder agreement.

Question 57

What should a shareholder agreement include?

Accepted Answer

Typically, a shareholder agreement (“SHA”) will contain the following main clauses:  Business of the Company – this is an overview of the company and the nature of the business that shareholders are required to promote and develop.  Transfer of Shares – Limits may be placed on selling shares in the company. This may include: sales of shares only being allowed by way of a specified process, shares having to be offered to the existing shareholders (pre-emption rights), drag-along and tag-along provisions on the sale of shares which protect the majority shareholders and minority shareholders respectively. There should also be a mechanism for valuing shares prior to their sale.  Issue of Further Shares – In order to prevent the potential dilution of shares held by the shareholders, there is usually a restriction to prevent the issue of further shares.  Management Decisions – The SHA will normally confirm which business decisions have to be taken by all the shareholders (unanimous voting) and which can be decided by majority voting and what percentage that majority should be (e.g., usually 75%).  Dividend Policy – Shareholders derive a return from their shares by way of dividends (income) or from their sale (capital). Unless there is a dividend policy stipulated in the SHA then declaring a dividend will be at the absolute discretion of the directors.  Restrictions on the shareholders – To prevent a shareholder from setting up in competition with their own company there are usually restrictions imposed on the shareholders dealing with joining competitors, and poaching staff and customers/clients.

Question 58

What's the difference between a shareholder agreement and articles of association?

Accepted Answer

Articles of Association (“Articles”) are a statutory requirement for all companies. In summary, it is the company’s constitutional document and can take the form of Model Articles (as set out in the Companies Act 2006), amended Model Articles or can be bespoke. The Articles are a public document and must be registered at Companies House when the company is incorporated. The Articles are a contractual agreement between all the shareholders of the company and regulate the way in which the company is managed e.g., setting out formalities for director and shareholder meetings.  A shareholder agreement (“SHA”) is a private agreement between the shareholders and usually act as additional obligations, over and above the Articles to regulate the relationship between the shareholders. As this is a private agreement, there is no requirement to register this at Companies House. The SHA takes priority over the Articles.

Question 59

What are the reasons for entering into a shareholder agreement?

Accepted Answer

Unlike the Articles of Association (“Articles”) which is a public agreement between the shareholders of a company, a shareholder’s agreement (“SHA”) is a private agreement between the shareholders and is not filed at Companies House. The SHA overrides the Articles.  Consequently, the main reasons for entering into a SHA are to keep the arrangement private and to allow the shareholders to decide what terms they want to govern their relationship.

Question 60

What areas can be covered in a shareholder agreement?

Accepted Answer

The principle areas are: the business of the company – the business that shareholders are required to promote and develop; transfer of shares - limits placed on the selling of the shares; issue of further shares – preventing the potential dilution of shares; management decisions – confirmation of the number of votes required for certain business decisions; dividend policy – specifying what dividends should be declared for the shares and restrictions on the shareholders –restrictions imposed on the shareholders dealing with joining competitors, and poaching staff and customers/clients.

Question 61

What can happen without a shareholder agreement?

Accepted Answer

Without a shareholder agreement (“SHA”) all decisions will be regulated by the company’s Articles of Association (“Articles”), company legislation and contract law. The Articles may not deal with all potential issues that may arise between shareholders and so the SHA should properly reflect the contractual relationship the shareholders want. The aim being to avoid relying on legislation or legal interpretation.

Question 62

Is a company a party to shareholder agreement?

Accepted Answer

The company is usually a party to the shareholder agreement (“SHA”) to ensure that the company, as a legal entity in its own right, is on notice of the terms agreed by the shareholders and in some circumstances the company does actually undertake certain obligations.

Question 63

Is a shareholder agreement legally binding?

Accepted Answer

Yes. It is a contract between the shareholders and, usually, the company and its terms can be enforced in the same way as any other commercial contract including the issuing of injunctions and claims for damages.

Question 64

Is a shareholder agreement mandatory?

Accepted Answer

A shareholder agreement (“SHA”) is not mandatory by reference to any legislation, however, it is best practice to have one as the document is designed to address the usual problems that may occur between shareholders.

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