Sale of Business Disputes

Commercial Disputes

We believe everyone is entitled to high quality legal advice, so we’ve put together some free guides on key areas of corporate and commercial law. Just select the topic you want to explore.

A buyer of a business may take the view that the business that it has bought is not the business it thought that it was going to get.

Sellers usually provide warranties in sale and purchase agreements about the condition of the businesses that they are selling. Where a seller makes warranties that are incorrect, a buyer can make a claim against the seller for damages for breach of warranty to put it in the position it would have been in had the warranties been true.

A buyer may believe that the seller has been untruthful about certain facts relating to the business to induce the buyer into buying it for more than it was worth. In such circumstances, the buyer can make a claim against they seller for fraudulent misrepresentation for:

  • rescission (to retrospectively cancel the sale and purchase agreement); or
  • damages to put the buyer in the position it would have been in had the fraudulent misrepresentation not been made (usually the price paid and other consequential losses) – damages can be claimed from the seller and personally from the individuals who made the representations.

We can assist in acting for either buyers or sellers in bringing or defending claims. We can help in securing evidence by working closely with trusted forensic computer experts. We can also help in calculating damages by working closely with trusted forensic accountancy experts.

Once we have assessed your case, we will be able to design a strategy for you to obtain a resolution to your dispute. We will aim to achieve a quick resolution without the cost, disruption and risk of court proceedings. If this is not possible, we will explain the court process, the costs likely to be incurred, the risks involved and the tools available to you to put pressure on your opponent to settle the claim without the need for trial (see link on RISKS below).

 
 

SALE OF BUSINESS DISPUTES

RISKS - COSTS ORDERS, ADR AND OFFERS OF SETTLEMENT

Introduction

When considering whether to enter into formal court proceedings it is very important that you understand the risks that you may not recover all of your legal costs even if successful and that you are likely to have to pay the majority of your opponent’s legal costs as well as your own legal costs if you are not successful. The court may also impose other sanctions relating to costs if it considers that you have not been reasonable in trying to seek to reach a resolution without the need for court proceedings or have been unreasonable in rejecting offers of settlement put forward by your opponent. This note provides guidance on these risks.

Costs orders

As a general rule, where court proceedings are issued on commercial claims above £10k, the court will usually make an order that the “loser” pay the “winner’s” costs of the proceedings (including solicitors’ fees, barristers’ fees and experts’ fees). However, there are some very important exceptions to this general rule and other important points to note.

The first important point to note is that whether or not to make a costs order is entirely within the discretion of the court. There is therefore never any guarantee that you will recover your costs even if successful.

It is also important to note that costs orders only reimburse you for your costs. Regardless of any costs order made by the court, you will remain liable to pay our costs for acting and advising on your behalf.

The court will only make orders for costs that it deems proportionate to the issues involved and the value of the claim. It will scrutinise costs estimates and will not allow recovery of costs that it considers to be unreasonably high.

The court will also take into account the conduct of the parties prior to and during the proceedings when deciding on what costs order to make including:

  • compliance with any pre action protocols (these set out the conduct the court expects for particular types of claims);
  • the willingness to exchange relevant information in order to narrow the issues;
  • whether a party has exaggerated its claim; and
  • attempts made to reach settlement.

Where there are a number of issues to be decided in a claim, the court may make a different costs order for each issue. It will take into account the extent of court time and costs involved in dealing with each issue.

There may also be hearings in the run up to trial to decide on certain procedural issues. For example, a parties may disagree on the evidence that must be disclosed or information that must be provided. The courts usually make separate costs orders relating to such hearings.

Given the above, it is important to appreciate that the benefit of a costs order may not cover all of the legal costs that you will incur. As a general rule of the thumb, the successful party at trial can expect to obtain a costs order in its favour that will cover roughly 70% to 80% of the costs that it actually incurs. Therefore, as a party will remain liable for its own costs, and given that even if successful, the costs order made in its favour will not cover the full extent of these costs, the shortfall will eat into and may even extinguish any damages awarded in its favour depending on the amount of damages it is able to recover.

The amount of costs recovered will also be affected by the size of the claim. The court has three tracks to which it assigns cases depending mainly on the value of the claim, namely:

  • the small claims track – usually deals with claims below £10k;
  • the fast track – usually deals with claims between £10k and £25k; and
  • the multi track – usually deals with claims above £25k.

There are special costs rules that apply to the different tracks as follows:

  • the small claims track – the court usually does not make any costs order in the winner’s favour;
  • the fast track – the court usually limits the amount recoverable for fees for attending at the trial. This changes according to the value of the claim. The highest amount recoverable at the time of writing (January 2016) is £1,995. You may wish to use a barrister that is more expensive than this and you may need our attendance which will be charged for at agreed rates. If so, you will not be able to recover all of these costs even if successful.

If you are the claimant, you should also be aware that once you issue proceedings, if you change your mind and want to discontinue your claim, it is usual for an order to be made that you pay the defendant’s costs up to that point.

Finally, you should also consider whether you will be able to obtain payment in respect of any costs order. This may be problematic if your opponent becomes insolvent or is difficult to trace.

 

ADR

This is short for alternative dispute resolution. The courts have made it clear that litigation should be used as a last resort and the parties should seek to use alternative means to reach a resolution to their dispute.

There are many different types of ADR. You can use a neutral expert or lawyer to make a binding decision or give their view on the case to help you decide at what level to settle at. However, by far the most common form of ADR is mediation. The usual procedure for mediation is that the parties agree on the appointment of a neutral mediator. They then hold a mediation where, following a joint session where each party makes any representations it wishes to make, the parties sit in separate rooms and the mediator goes from room to room, discussing each parties’ position with them on a confidential basis, facilitating the exchange of offers with the aim of the parties voluntarily reaching an agreed settlement.

There is normally no obligation on a party to agree to ADR, however, the courts will not make a costs order if it takes the view that a party has unreasonably refused an offer of ADR made by its opponent and will require a witness statement to be filed to set out the reasons for refusal.

 

Offers of settlement

The usual costs rules referred to above may not apply where the claimant or defendant makes on offer of settlement that complies with Part 36 of the Civil Procedure Rules (the court rules). This is known as a Part 36 Offer.

A Part 36 offer has financial consequences for the recipient of the offer if it rejects the offer and does not get a better result at trial.

 

The basics

The basics of a Part 36 Offer are as follows:

  • it can be made or accepted before or after legal proceedings have been started but must be in writing and comply with certain formalities;
  • it states a figure either offered by the claimant to the defendant or by the defendant to the claimant (inclusive of interest) which, if accepted will bring the claim to an end;
  • specifies a period of not less than 21 days (called the “relevant period”) in which, if the offer is accepted, the defendant will pay the claimant’s costs of bringing the claim (to be agreed or assessed by the court if agreement can’t be reached);
  • if the offer is accepted, the defendant must pay the sum offered within 14 days.

Late acceptance

If the claimant accepts a defendant’s offer outside of the relevant period, the court usually orders the defendant to pay the claimant’s costs up to the end of the relevant period and the claimant to pay the defendant’s costs from the end of the relevant period up to the date of acceptance.

If the defendant accepts the claimant’s offer outside of the relevant period, the court usually orders the defendant to pay the claimant’s costs of the proceedings up to the date of acceptance.

Failure to beat a Part 36 Offer

If a claimant wins at trial but fails to obtain a judgment that is more advantageous than the defendant’s Part 36 offer, the court will usually make the following order:

  • the defendant pay the claimant’s costs up to the end of the relevant period;
  • the claimant pay the defendant’s costs from the end of the relevant period; and
  • the claimant pay interest on the defendant’s costs from the end of the relevant period (the rate agreed for this is usually 1% above the base rate of the Bank of England).

If the claimant wins at trial but the judgement is the same or more advantageous than the claimant’s Part 36 offer, the court will usually make the following order:

  • the defendant pay enhanced interest on the amount of money awarded in the judgement at up to 10% above the base rate of the Bank of England from the end of the relevant period;
  • the defendant pay the claimant’s costs on the standard basis (assessed in the normal way) up to the end of the relevant period;
  • the defendant pay the claimant’s costs on an indemnity basis (a more generous basis of assessment with less irrecoverable costs where the benefit of doubt on what is reasonable is given to the claimant) and interest on these costs at a rate of up to 10% above the base rate of the Bank of England from the end of the relevant period up to the date of judgment;
  • the defendant pay an additional amount of 10% on the first £500k of money awarded in the judgment and 5% of any amount of money awarded in the judgment above £500k up to a maximum sum of £75k.

It can be seen from the above that:

  • a Part 36 offer made by a defendant can be a useful tool for pressurising a claimant to accept a reasonable offer as even if the claimant wins, it may have to pay significant costs to the defendant which will eat into and may even extinguish any damages recovered; and
  • a Part 36 offer made by a claimant, if pitched at a reasonable level, will put the defendant under considerable pressure to accept given the heavy penalties it will suffer if it does not beat the offer.

Given this, it is sensible to make an offer as soon as there is sufficient information to judge the likely award to be made at trial and prior to issuing proceedings if possible.

 
COSTS ESTIMATE

First meeting

The amount of work required to deal with a claim varies according to a number of factors including:

  • the value and complexity of the case;
  • the amount of relevant documents to review;
  • the number of witnesses to interview;
  • the number of issues requiring expert evidence;
  • the likely length of trial;
  • the amount of effort made to reach settlement; and,
  • the stage of the process at which settlement is reached (if at all).

We offer a one hour meeting at a fixed cost of £100 plus VAT at which we will:

  • discuss the background of your dispute with you;
  • identify the extent of the initial work required;
  • provide you with our initial thoughts on your legal position;
  • discuss the basis on which we will charge; and
  • provide you with our initial view on our estimate of costs.

We usually charge on a time basis. However, where it is possible to clearly identify the amount of work required to carry out a particular step in the process, we may be able to offer you a fixed fee for this. There are other types of charging arrangements that we may be able to enter into with linked funding options. Please see the link below on “FUNDING OPTIONS” for further information.

 
Subsequent steps in the case

The procedural steps required by the court differ depending on the value of the claim but typical steps required up to the end of the trial include the following:

  1. Pre-action
  2. Statements of case
  3. Case Management Conference
  4. Disclosure and inspection
  5. Witness statements
  6. Experts’ reports
  7. Pre-trial review
  8. Trial preparation
  9. Trial
  10. Settlement

Once the pre-action correspondence has been completed and we have considered your opponent’s position, we will be in a position to provide you with an estimate for the work set out above.

There may be other steps that are required depending on what applications in the proceedings you or your opponent may make (e.g. applications for the disclosure of specific documents, requests for further information) and the directions given by the court. We will advise you on the estimated costs of dealing with these steps if and when they are contemplated.

If at any stage it looks like our estimate is likely to be exceeded, we will contact you with a revised estimate. We normally bill on a monthly basis and will review actual fees against our estimates when each bill is submitted.

Disbursements

As well as payment of our fees, there are other out of pocket expenses that you may incur, these include the following:

  • court fees – these differ if you are claimant or defendant and depending on the value of the claim;
  • barristers’ fees – these differ based on the experience of the barrister selected, we will obtain quotes for you to consider at the time the barrister is to be instructed; and
  • experts’ fees – these differ depending to the type and experience of the expert instructed, we will obtain quotes for you to consider at the relevant time. 
FUNDING OPTIONS

Traditionally, solicitors charge on a time basis where the client is billed for the time spent dealing with the case and pays these charges as the case proceeds. However, there are other possible fee arrangements and funding options that are available.

 

Before the event legal expense insurance (BEI)

The first thing you should consider is whether you already have any existing legal expense insurance. An example of this is professional indemnity insurance but cover can also be provided in financial products that you might not expect to provide cover such as household or motor insurance policies that you or others that you live with may have. If you do have such insurance and you are defending a claim, you should give your insurers notice as soon as circumstances arise that might give rise to a claim against you.

 

Conditional Fee Arrangement (CFA)

Under a CFA you do not pay any fees to us or you pay lower than our normal fee if your case is lost but pay higher than our normal fee if your case is won. Our normal fee is based on the hourly rates that we usually charge and the fee payable on success is a percentage increase on this up to a maximum of 100% (e.g. £0 if you lose, £225 per hour (an example normal hourly rate) plus 100% success fee = £450 per hour if you win).

Because we would be taking on an element of risk in entering into a CFA, we will need to carry out a thorough review of the evidence and prepare a risk assessment before we can take a view on whether to agree to enter into the CFA and, if so, what the success fee should be.

It is important to note that the usual costs rule that the loser pays the winner’s costs does not apply to the success fee element of the charges. This element of the charge will therefore eat into any damages recovered.

This type of option may be attractive where the merits of your case are strong and there is limited funding available for fees as you will not have to pay our normal charges in the run up to trial. You will however need to fund your disbursements (out of pocket expenses including court fees, barristers’ fees, and experts’ fees) and will usually be liable to pay your opponents’ costs under a costs order if you lose. However, after the event legal expense insurance may be available to help with this (see below).

 

After the event legal expense insurance (AEI)

With traditional time based charges, this type of legal expense insurance will pay for your solicitors’ fees and disbursements in the run up to trial. If you lose, you will not have to repay these costs and the insurance will also cover any liability you incur in having to pay your opponent’s costs under a costs order. You will not have to pay the insurance premium up front and it will not be payable if you lose. It will only be payable if you win after the trial at a time when funds may be available from your opponent from the payment of any judgement or costs order made by the court. However, it is important to note that the liability to pay the premium remains regardless of whether any payment of any judgement or costs order is actually recovered from your opponent.

AEI is also useful when used in conjunction with a CFA. It will fund your disbursements in the run up to trial and these will not be repayable if you lose (in the same way that our costs will not be payable if you lose in a no win no fee CFA). The premium will only be payable if you win in the same way as described above when AEI is used with traditional time based charging arrangements.

As insurers will be taking on significant risk, they often require a thorough consideration of the evidence and strong assessment of merits from an independent barrister before they are willing to proceed. It should be noted that premiums can be high and are not recoverable from your opponent. This means that it may significantly eat into any recovery made from your opponent.

 

Damages based agreement (DBA)

These are agreements where we are paid a percentage of the damages recovered. The percentage cannot exceed 50% of the damages recovered less any barristers’ fees. The actual percentage applied will be calculated based on an assessment of the chances of success after a thorough review of the evidence.

A DBA can be combined with AEI in the same way as with a CFA to provide cover for your disbursements and any costs order should you lose at trial.

 

Third party funding

If you are a member of a trade union or a professional body, they may provide you with funding for legal expenses as part of the benefits of membership.