In the wake of the Prime Minister’s Sunday statement, on 12 May 2020 the Department for Education (DfE) released guidance on returning to school. It is expected that as with all sectors, this guidance will be updated in accordance with scientific and medical advice. The guidance aims to assist headteachers on the protective measures they should be implementing to keep staff and pupils safe when schools re-open.

As of 1 June 2020 schools will be opening their doors not only to vulnerable children and children of critical workers, but also to children in nursery, reception, year 1 and year 6. The DfE is also asking for nurseries and other early years providers to start re-opening (with further Government guidance to follow) and for some face-to-face support to be provided to year 10 and year 12 students, on top of the remote education they are currently receiving, to assist with their preparation for key exams next year. The aim is for pupils to return to their educational settings gradually, where a risk assessment indicates that it is appropriate for larger numbers to be in schools, placing them in the best environment for their learning and development whilst enabling families to return to work.

This Government advice outlines the following topics:

1. Effective infection protection and control

Schools are expected to implement measures to reduce the risk of both direct transmission (e.g. through proximity to another who is sneezing and coughing) and indirect transmission (e.g. touching contaminated surfaces) of the Coronavirus. Examples given in the guidance include asking pupils and staff to wash their hands more often than usual and for the frequent cleaning of classroom surfaces.

2. PPE, including face coverings and face masks

If an organisation normally uses PPE (personal protective equipment) then it will be expected to continue to do so. However, schools do not normally use PPE and there is no obligation for this to start, in fact the DfE recommends against it except where a pupil’s care routinely already involves the use of PPE due to their intimate care needs. One reason given by the guidance is that where a child is not able to handle PPE correctly this may inadvertently increase the risk of transmission. The only other time that PPE should be issued is where a pupil becomes unwell with symptoms of Coronavirus at school and needs direct personal care until they are able to go home.

3. Shielded and clinically vulnerable children and young people

Extremely clinically vulnerable pupils are being advised to shield and are not expected to attend their educational setting. A list of people who are described as being “extremely clinically vulnerable” can be found here. This includes, amongst others, those who are receiving cancer treatment or who have had a solid organ transplant.

Clinically vulnerable pupils who are not classed as extremely clinically vulnerable should follow medical advice when deciding whether they should return to school.

4. Shielded and clinically vulnerable adults

Staff who are extremely clinically vulnerable should be shielding and not attending work as it is not safe. However, staff who are clinically vulnerable, but not extremely clinically vulnerable, should work from home where possible. However, if their role cannot be carried out from home, they may return to work provided schools take measures to protect them in the workplace, such as offering them the safest available on-site role.

5. Living with a shielded or clinically vulnerable person

If a pupil or staff member lives with a person who is clinically vulnerable, but who is not extremely clinically vulnerable, they can attend school. However where a member of the pupil’s or staff member’s household is classed as extremely clinically vulnerable they should only go to school if stringent social distancing is implemented effectively. If not, it is advised that the pupil or staff member should learn or work from home respectively.

6. Class or group sizes

The staff-to-child ratio for pre-school children in early years settings should continue as set out in the early years foundation stage (EYFS). Primary school classes should be split in half with a maximum number of 15 pupils per group, whose desks should be spaced as far apart as possible, and one teacher. Secondary schools should also halve classes and are expected to rearrange classrooms and workshops so that pupils are sitting two metres apart.

Schools are advised to create an environment where staff and pupils only mix in small, consistent groups. These groups should stay, where possible, two metres away from other groups and follow recommended hygiene and cleaning measures to reduce the risk of transmission.

7. How to implement protective measures in an education setting before wider opening on 1 June 2020

Schools are being advised to take steps to plan and organise effectively the return to school. The guidance suggests steps such as: altering the timetable (e.g. to stagger drop-off and pick-up times, assembly groups and break times), removing soft toys which are hard to clean and refreshing the school’s risk assessment and other health & safety advice.

It is important for staff and parents to have confidence in the measures taken by the school and therefore, it is recommended that schools should be communicating their plans with staff and parents around the return to school. This could include: explaining that any pupils or staff who are displaying Coronavirus symptoms should not return to school, advising on transport options to and from school, and ensuring that parents are aware that they cannot gather at the school’s entrance gates.

8. How to implement protective measures in an education setting when open

As discussed above, schools should do their best to keep small groups together and away from other groups. The guidance sets out a number of measures which should be implemented. For instance: schools should also make sure that efficient cleaning is taking place, that transmission is being prevented as much as possible through staff and pupils following the recommended hygiene practices, and that the use of shared resources such as stationery is reduced.

9. Contact tracing in educational and childcare settings

At present, the Government is developing a national test and trace programme which will bring together an app, expanded web and phone-based contact tracing and swab testing for those with potential Coronavirus symptoms. Further detail will follow on how this will operate in educational and childcare settings.

10. Steps to take when someone becomes unwell at an educational or childcare setting

If a pupil or staff member shows symptoms of Coronavirus they should be sent home and advised to follow the Government guidance for households with possible coronavirus infection. Whilst waiting to be collected they should be moved to a room so that they can isolate behind a closed door with the window open. Where a child awaiting collection requires supervision, staff caring for them should wear PPE if possible. Alternatively, if they cannot be isolated, they should remain at least two metres away from anyone else.

11. Steps to take if there is a Coronavirus case at an educational or childcare setting

In this situation, the person with symptoms compatible with Coronavirus should be sent home to self-isolate for seven days. Here the rest of the household should self-isolate for 14 days and all staff and pupils at the school will be given access to a test should they display Coronavirus symptoms.

If a person tests positive, their entire class or group at the school should be sent home and advised to self-isolate for 14 days. It is important to note here that other household members of this class or group will only be required to self-isolate if the pupil or staff member they live with from the class or group develops Coronavirus symptoms.

12. Reporting on a child’s temperature at the start of each day

This will not be required as the Government does not consider this to be a reliable method for identifying Coronavirus.

13. Testing children and young people

Once schools open to a wider number of children than is currently envisaged for the 1 June 2020, any pupils or school staff, and any members of their households, will be able to take a Coronavirus test if they display symptoms.

14. Testing teachers and other staff with symptoms

Anyone involved in education, childcare or social work is deemed to be an essential worker and as a result, these people already have access to testing if they have symptoms.

15. Managing risks in supporting children and young people with complex needs at special schools and colleges

Further guidance on this point can be found here, including recommendations on how to conduct risk assessments on supporting children and young people with education, health and care plans.

16. Implementing protective measures in Alternative Provision

Alternative Provision settings are expected to follow the same principles and guidance as mainstream schools discussed above. Risk assessments may, however, need to be carried out where it is felt that a child or young person may not be able to follow instructions, as it may be decided, in rare circumstances, that these pupils should stay at home.

If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact: Hollie Suddards in Michelmores’ Education team.

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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing. 

Government’s latest announcement

The much-publicised and anticipated Government announcement regarding a possible easing of the lockdown restrictions was delivered by the Prime Minister at 19.00 yesterday (Sunday 10 May 2020).

There was the promise of more detail, which is scheduled to be unveiled in Parliament on Monday 11 May 2020, with an opportunity for the public to ask questions this evening. Until then, we have the following information:

What has changed?

Since the beginning of the lockdown, employees have been told that they should work from home if they can, and only leave their home to attend their workplace if they must. With effect from Monday 11 May 2020, the emphasis has changed – the Government has said that anyone who cannot work from home (for example, those in manufacturing or construction) should be actively encouraged to go to work.

However, public transport should be avoided if at all possible, by travelling to work by car, bicycle or on foot. The Prime Minister’s announcement included reference to “new guidance for employers to make workplaces COVID-secure”, but we have no details of when this may be released.

What may change?

The Government has set out the following “roadmap” for a further gradual easing of lockdown, the implementation dates and detail of which will depend on the “COVID Alert Level” (similar to the terror threat ratings) and the “R” rate (rate of reproduction of the virus).

1. At the earliest by 1 June 2020, there may be a phased reopening of shops and the possible reintroduction of primary school attendance, beginning with Reception, Year 1 and Year 6. There is intimation that those in Year 10 and Year 12 of secondary education may also be back in school before the summer holidays.
2. At the earliest by July 2020, there is a plan to reopen some of the hospitality industry and other public places, provided they are safe and enforce social distancing.

Initial reflections on the latest announcement

It is fairly clear that “actively encouraging” employees to attend the workplace where working from home is not possible is only directed at those sectors which have been permitted to remain open during the lockdown, such as businesses in the manufacturing and construction industry.

For those with jobs in the hospitality or high street retail sectors, the status quo will remain for now, until such time as the Government permits business to resume in these areas.

The difficulty with the phrase “actively encourage” is that it provides no clarity for employers as to whether this is merely a suggestion, or an instruction, to their employees, and does not indicate what options are available to them if such active encouragement does not yield the desired results.

What happens if an employee is “actively encouraged” to return to work, but does not do so, citing the increasing UK death toll and the risk of transmission in an enclosed environment as their rationale? Is the employer able to force a return to work, or initiate disciplinary action in the event of a no-show?

As discussed below, there are legal risks in knee-jerk reactions to such situations. Although very much uncharted territory, we consider that Employment Tribunals will have sympathy with employees who are reticent to return to the workplace, particularly when so little is known about the virus. We provide tips on trying to minimise any legal risk, and maximise employee engagement, later on in this article.

Looking to the future

In line with the Government’s tentative predictions for easing the lockdown,, many employers are starting to plan for an eventuality in which they can at least commence a partial business re-opening. Given the amount of planning involved in such a move, proper organisation and preparation in this instance is key.

Those leading the way….

Several ‘big names’ decided to shut up shop when lockdown began, despite the fact that they operated in sectors which were permitted to remain open under the Government’s rules. However, after over a month of closure, some are taking tentative steps towards getting back to business.

As of 30 April 2020, six branches of hardware store Wickes have re-opened. They are operating with reduced trading hours, and are only permitting a limited number of customers in the store at any one time. Social distancing is enforced by floor markers, Perspex screens have been installed at tills, hand sanitising stations are available for customer and staff use, and all shop floor staff will be provided with PPE (personal protective equipment).

House builder Devonshire has commenced a controlled reopening of some of its sites from early May, after a full-scale closure on 27 March. It is operating in accordance with guidelines from the Health & Safety Executive and has devised a specialised “COVID-19 procedure”, in respect of which all of its site management team will be fully inducted.

Is there any guidance for working practices when lockdown is eased?

Currently, there is no published generic guidance, although the existence of such was mentioned in the Prime Minister’s 10 May 2020 announcement. This is likely to be released to the public in the forthcoming days.

There is already guidance in place for the manufacturing sector, which was expressly permitted to continue to conduct operations by the Secretary of State for Business on 08 April 2020. The guidance, entitled ‘Operating Safely in the Workplace’, will nevertheless provide a good starting point for businesses in all sectors who are looking to return to work. It can be found here.

The Trades Union Congress (TUC) has recently published a report setting out the steps it wants the Government and employers to take to ensure a safe transition from lockdown. Amongst other things, it includes the suggestion that employers conduct a COVID-19 specific risk assessment before bringing employees back to work. Whilst it is unclear whether the Government will take this paper into account when deciding on its strategy, it provides a useful insight into the issues likely to be raised by employees.

A survey conducted by the TUC during April 2020 found that 41% of almost 800 people surveyed were worried about the health implications of returning to work. It is likely that a large proportion of an organisation’s workforce may be sceptical about returning to the workplace and will be looking to their employer for reassurance that the appropriate measures have been put in place.

For those businesses in the retail sector, the British Retail Consortium has published guidance for retailers in respect of warehouse and distribution settings, as well as retail premises when these are permitted to re-open.

Working practices checklist… minimising the risk

As discussed in our Employment Digest dated 27 April 2020, there are provisions of the Employment Rights Act 1996 which state that employees have a right not to be subjected to any detriment or dismissed on the ground that they refused to return to their place of work in circumstances where they reasonably believed there to be serious and imminent danger. Any dismissal in this context will be ‘automatically unfair’, and an employee will not require the usual two years’ service in order to bring a claim. Such a claim might be accompanied by a whistleblowing detriment claim.

It follows that there is a risk of litigation where an employer takes management action against an employee who refuses to attend work due to the risk of contracting COVID-19. There is also the wider risk that employers may be subject to enforcement proceedings by the Health & Safety Executive for breach of their obligations to provide a safe working environment. A clear way of mitigating this risk is to ensure that as many precautionary practices as possible are implemented; certainly those as advised from time-to-time by the Government and Public Health England, but also additional measures as may be relevant for an employer’s particular sector of work.

This is by no means exhaustive, but we have set out a checklist of possible considerations, below. We would recommend carrying out a risk assessment first in order to consider the practicalities and implications of our suggestions. If you employ or engage a health & safety professional, seek their input on the following:

• Whether a full or only partial return to the workplace can be facilitated, whilst complying with social distancing requirements
• Identify those employees who are vulnerable, and how/when they should return to the workplace (perhaps, where possible, allowing them to work at home)
• How the workplace can be rearranged to comply with social distancing measures (for example, rearranging workstations and dividing up large floor areas with partitions)
• Implementation of staggered start / finish times
• Temporary ban on group lunches and after-work drinks
• Temporary ban on team / group meetings and consideration of how these might otherwise be conducted (e.g. utilising technology used during lockdown)
• Temporary ban on external visitors to the workplace (external meetings to continue to be conducted over Zoom / Microsoft Teams / Lifesize etc. where possible). If this is not possible, keep a log of all visitors for contact / tracing purposes
• Rotate the number of groups of employees in the workplace at any one time (and assigning employees to specific groups to minimise risk of contamination)
• Assign particular toilets and kitchen facilities to specific groups to minimise risk of contamination
• If hot-desking is normal practice, avoid this and assign employees their own workstations
• Encourage / require employees to use NHS tracing app or similar, once available
• Ensure the contact details of employees and their emergency contacts are up-to- date
• Consider the use of PPE, where applicable. Although the Government has not currently recommended the generic use of face masks, this may change in the coming days / weeks
• Ensure hand sanitiser and anti-bacterial wipes are available at various points throughout the workplace (particularly at risk points such as printers) and require employees to undertake cleaning of workstations several times a day
• Consider (if applicable) the use of Perspex screens for higher-traffic areas, reception staff etc.

Once the risk assessment has been undertaken, the drafting of a specialist COVID-19 staff policy would ensure that employees have clear guidelines for working safely.

Refusal to return to work… a practical take

We have discussed, both here and in our recent Employment Digest, the legal risks involved in taking action against an employee who refuses to return to work due to a risk of contracting Coronavirus (COVID-19). As set out above, a strict implementation of all possible precautionary measures should limit the risk of any detriment or dismissal claim from an employee against whom management action is taken as a result of refusing to attend work.

However, we are dealing with a virus about which even medical specialists know relatively little. The Government’s lockdown measures have increased the palpable fear amongst the general public and, with the current death toll, employees’ reservations about returning to an environment in which social distancing will be a challenge are understandable.

If all reasonable steps have been taken in respect of health & safety, but an employee still refuses to return to work, there are options outside formal disciplinary action. The consideration of other options might be particularly useful with a well-respected, long- standing employee whom an employer would wish to retain if at all possible. Where working from home is not viable, it could be suggested that the employee use some of their holiday entitlement, or take unpaid leave, during the period in which they do not wish to attend work. Of course, this is not a long-term solution, but the situation with regard to Coronavirus (COVID-19) may have improved sufficiently by the end of such holiday / unpaid leave, to enable the employee to return to work.

Workplace reintegration… which employees should return?

For many employers, any easing of the lockdown will facilitate a partial, rather than a full, reopening of their business in the short-term. With the Coronavirus Job Retention Scheme in place until the end of June, employers are likely to decide to un-furlough only part of their workforce in the initial phase. But how should that selection process take place?

For some businesses, the process will be straightforward, as entire departments will be required to return immediately (subject to any shielding requirements, below). For others, it may be the case that only a proportion of employees in certain areas are required, given a temporary reduction in the amount of work being carried out. This situation is rather less simple – some employees may be very keen to escape the confines of their home and return to work. Others may be less so.

It is clear that those employees who are shielding, in accordance with Government guidance and correspondence issued to them by the NHS, should remain at home until such time as a medical professional advises them that it is safe to leave. For those in the less vulnerable category (such as the over-70s and those with less acute health conditions), who have been advised to social distance, rather than shield, the situation is slightly less clear, as is the case for those who have childcare commitments, due to the closure of schools and childcare facilities.

Whilst employers might consider that excluding these individuals from any initial return-to-work process might be the considerate thing to do, they should avoid making generalised assumptions which, in themselves, could pose a risk of discrimination. It is likely that those with childcare responsibilities will need to remain at home during school closures, but it should not be assumed that this is the case.

In light of the above, a sensible first step might be to ask for volunteers to be un-furloughed and return to work. This minimises the risk of discrimination arising from generalised (if well-meaning) assumptions being made. It will give employees who wish to return the opportunity to do so. If sufficient volunteers come forward, there is no need to enforce a return on anyone. If employees do need to be required to return, then employers can be safer in the knowledge that they have given everyone an opportunity to return voluntarily, and have therefore not excluded individuals unintentionally by virtue of pre-conceptions.

Return to work and mental health

The last few weeks have been a struggle for many, and the change in environment, working patterns and caring responsibilities, alongside the worry surrounding the virus itself, have left a large number of people suffering with mental health issues, even those who had not previously suffered with symptoms.

Alongside this existing anxiety, a new wave of emotions may come with the prospect of returning to the “outside world”, to a workplace in which social distancing cannot be guaranteed and the complications, such as commuting on public transport, that a return to work may bring. Some employees may have suffered bereavements during the lockdown, which will make a reunion with colleagues even more difficult.

With this in mind, it would be useful for employers to review their support packages, such as complimentary counselling or employee assistance programmes, and make sure that employees are aware of how to access them. If employers do not currently subscribe to any such programmes, and do not have the funds to do so at present, they could signpost their employees to any of the mental health charities, or the NHS website. Another option would be to appoint ‘mental health first-aiders’ – employees within the organisation who are happy to have confidential conversations with colleagues who are feeling vulnerable.

The future of flexibility… permanent working from home?

The recent weeks have shown a seismic shift in the way we work. Organisations with no working-from-home policy, whose cultures centred on ‘presenteeism’ and chats in the communal kitchen have, in a matter of days, shifted their entire operations online, to permanent remote working and ‘virtual coffees over Zoom’. Many businesses doubted their IT infrastructure could cope but, aside from a few teething problems, it seems that office work has been brought successfully into the digital sphere.

In the longer term, we predict that many businesses will shift to remote working on a more permanent basis, particularly in areas of the country where office space is at a premium and the average commute is long. Savings in rent and increased productivity from employees can only be an advantage. The model has been trialled in the most testing of times – and it works.

However, other organisations may be less amenable to the shift. Undoubtedly, there are drawbacks to remote working. Junior members of staff learn most of their craft by listening to and observing more senior colleagues, something which cannot achieved as easily over video link. There may be less opportunity for the spontaneous sharing of ideas, than when sitting next to a colleague day-to-day, and it may be more difficult to foster the organisation’s culture and collegiate atmosphere.

One thing seems certain – there is likely to be a large increase in the number of flexible working requests. Employees have seen that agile working can be successful in practice, and employers will, as a result, find it harder than ever before to justify a refusal of such a working pattern. Although the financial award in the Employment Tribunal for breach of the flexible working legislation is relatively low, the refusal of a request with a childcare or disability element comes with potential for uncapped compensation. Paper trails of decisions, and rationales for refusals, will become more important than ever.

Coronavirus (COVID-19) and redundancy

A sad, but perhaps inevitable, consequence of Coronavirus (COVID-19) is the clear impact that it will have on businesses, their revenue and, at the heart of it all, their employees. A large number of businesses are already making preliminary preparations for potential redundancies when the Government’s Job Retention Scheme comes to an end.

Unfortunately, these redundancies are unlikely to be isolated pockets; rather, there are likely to be large-scale employee cuts as businesses try to keep trading in very uncertain economic times. Such widespread job losses are likely to engage collective redundancy obligations, which apply where 20 or more employees are proposed to be made redundant at one establishment within a period of 90 days or less. For between 20 and 99 redundancies, the statutory consultation period must be 30 days. For 100 or more redundancies, the minimum period is 45 days. If an employer does not recognise a trade union, and there are no other employee representatives already elected, an election process will need to be conducted prior to the start of the consultation period.

The latest iteration of the Government’s guidance on the Coronavirus Job Retention Scheme has clarified that, whilst on furlough, employees who are union or non-union representatives may undertake duties involved in collective consultation. This will be of some comfort to employers, who will not have to un-furlough employee representatives in order to conduct collective consultation, and will be able to continue to claim 80% of their salary (or £2500, if lower) during this time.

Spotlight on Property… the move to a virtual office

Some businesses might already be considering the continuation of home working for the foreseeable future. But what does that mean for the leases entered into by these organisations in respect of expensive business premises, which are currently lying empty? Depending on the terms of the lease, there may be ‘break clauses’ which could be utilised to bring an early end to the arrangement. It is always worth having the lease reviewed by a specialist in order to understand all the options available.

If you require specialist advice in respect of your business premises arrangements, please contact Andrew Baines in Michelmores’ Property Litigation team.

Coronavirus (COVID-19) testing and data protection

Testing for Coronavirus (COVID-19) is now available to all individuals classed as ‘essential workers’ with symptoms, as well as those who are symptomatic and carry out work which cannot be done from home (e.g. construction workers, shop workers and delivery drivers). The full list of essential workers is here, and includes those working in the NHS, social care staff, transport workers, education and childcare workers, and those individuals involved in the production and distribution of food, drink and essential goods.

Employers of essential workers are able to register and refer members of staff for tests. They can obtain a login for the official portal by emailing portalservicedesk@dhsc.gov.uk with the organisation name, nature of the organisation’s business, the region, and names and email addresses of two users who will be responsible for uploading essential worker contact details. More information can be found here.

The test results received by the employer will constitute ‘special category’ (sensitive) personal data. Under the General Data Protection Regulation (GDPR – a hot topic alongside Brexit and COVID-19) an employer is entitled to process special category data where necessary to comply with their obligations under employment law, which includes ensuring the health, safety and welfare of their employees. However, this must be conducted in a necessary and proportionate manner.

Given that employers will have a clear legal basis for processing such data, they do not need to obtain consent, but the employee must be clearly informed that the data will be used to take decisions about their employment (such as sending them home to self-isolate), with whom the information may be shared, and that it will be retained on the employee’s HR file for a period of time (which should be no longer than is necessary).

If an employee tests positive for Coronavirus (COVID-19) then their identity should not be shared with their colleagues as a matter of course, although generic information that there has been a confirmed case of the virus in the workplace may need to be shared. If it is considered necessary to share the name of the employee, we would advise that their consent be obtained in advance.

 [CONTENT CORRECT AS AT 11 MAY 2020]

If you would like to discuss any of the issues raised in this briefing, or have other concerns about the impact of Coronavirus, please contact Rachael Lloyd, James Baker or Andrew Tobey in Michelmores’ Employment team.

CORONAVIRUS STOP PRESS – Click here to keep up to date with all of our latest articles.

This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.

The continued growth of crowdfunding as a popular means of raising finance indicates that it is here to stay. Whilst “crowdfunding” is a general term which describes funds being raised from multiple individuals (whether by issuing debt, equity or rewards and donations, for example), in this article we will be looking only at “crowdfunding” of shares in private companies (equity fundraising) using a mainstream online crowdfunding platform.

It is estimated that in 2018 crowdfunding was involved (typically alongside other private investors) in 22% of all equity investments into high growth British businesses. To put this into context, as recently as 2011 only 8 deals included funding from a crowdfunding site. There are various reasons for this growth, and the ongoing emergence of alternative finance generally. Some obvious examples would be the increasing number of successful exits being achieved by crowdfunded companies, the ongoing desire for wealthy private individuals to pursue tax-efficient investment opportunities, and further investment in crowdfunding platforms by venture capital firms and the crowd itself.

One of the great attractions of crowdfunding through an online platform is that it is generally perceived to be user-friendly. Crowdfunding platforms tend to have very engaged in-house teams who help fundraising companies through the process of issuing equity to investors – usually with relatively accessible, standardised documents. For many start-ups and high-growth companies, the funds raised through the crowd are essential to the continuation of their business, and so there is little appetite to spend hard-earned cash on professional advice to support the raise.

However, professional advisers (primarily lawyers and accountants) can add significant value in supporting a fundraising company through a crowdfunding raise. In many instances it will be cost-effective and proportionate to engage some expert help. Whilst some companies raise funds successfully through a crowdfunding platform without outside help, deciding not to instruct lawyers (even on a lightweight budget) could result in serious problems further down the line, some of which may prove terminal to the lifeblood of the company.

Each board of directors will need to decide on the best approach for their particular company, but here are some scenarios where involving lawyers to assist with a crowdfunding campaign can add value far exceeding the initial cost of the advice.

1. Choosing your crowdfunding platform

Even at this preliminary stage there are certain differences between crowdfunding platforms that are worth discussing with your legal advisers.

For example, will there be one ‘nominee’ shareholder (managed by the crowdfunding platform) or will each individual member of the crowd be registered as a shareholder of the company? There are benefits to both approaches, but certain crowdfunding platforms tend to favour one over the other – and this might not correspond with your preference.

A shock for many entrepreneurs is the amount of time and effort required to get a crowdfunding campaign over the line – whilst simultaneously trying to drive forward the growth of the business. It is tempting to focus solely on the financial cost of involving lawyers to help with managing and negotiating a crowdfunding raise, but this should always be weighed against the opportunity cost of an entrepreneur being pulled away from the core priority of growing their company.

1. Due diligence and resolving historical issues

As part of the onboarding process to set up the crowdfunding campaign, a crowdfunding platform will perform due diligence on your company. Depending on the age and progress of the company, responding to due diligence enquiries can be time-consuming and complex – an undertaking with which lawyers are ideally-placed to assist.

Issues will often arise during due diligence which need to be addressed prior to the crowdfunding campaign launching. Typical examples include problems with share capital, commercial contracts and the ownership of intellectual property. Involving lawyers at the outset will help to flag difficulties early, and resolve them swiftly, without causing delays to the crowdfunding campaign and a loss of momentum.

1. Independent advice

Whilst a crowdfunding platform will often provide assistance with legal documents, it is not providing legal advice to the company, and inevitably, there will be areas where there is an inherent conflict of interest between the company’s/founder’s best interests and those of the crowd.

It is in these key areas – such as the negotiation of warranties, limitations on claims or non-compete covenants from the founders – where independent advice will be hugely valuable; simply because the financial repercussions for the company/its founders of failing to negotiate a fair and reasonable position could be extremely damaging.

1. SEIS/EIS relief

As suggested above, the availability of advantageous tax treatment – primarily SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) relief – is one of the primary reasons why crowdfunding has grown so quickly. The majority of crowdfunding opportunities are SEIS/EIS-qualifying, and investors will expect to be eligible for the relevant relief. As we have explored previously, the consequences of losing SEIS/EIS relief can be very severe and great care should be taken to ensure that this only happens where there is a tangible benefit to the parties in doing so.

In broad terms, these reliefs provide three key benefits to investors (in addition to advantageous inheritance tax treatment), which are currently:

1. Income tax relief of 30% or 50% of the value of the investment (i.e. a reduction to the individual’s tax bill in that year of £3,000 or £5,000 on a £10,000 EIS/SEIS-qualifying investment).
2. Capital gains tax relief on any gains accrued on the subsequent sale of the shares, with the ability to defer this by investing in another EIS/SEIS-qualifying company.
3. In the event that the company fails, and a loss is suffered on the investment, loss relief of an equivalent rate to the highest rate of income tax that the individual pays.

The rules relating to SEIS and EIS relief are complex and ever-changing. Whilst crowdfunding platforms will help with certain aspects of compliance (such as issuing the relevant certificates to investors), it is worth obtaining expert advice very early in the life of the company to try to ensure that the proposed structure and growth plans of the business are, and will continue to be, SEIS/EIS-compatible. For example, many companies will apply to HMRC for ‘advance assurance’ that their fundraising will be SEIS/EIS-qualifying, which will typically involve assistance from professional advisors.

1. Negotiating the shareholders’ agreement and articles of association

Usually, it will be a condition of a successful crowdfunding raise that the company adopt a new set of articles of association and the shareholders of the company enter into a shareholders’ agreement. Typically, these will contain various protections for the crowd, which may include the right to appoint a director or board observer, commercial warranties to be given by the founders, and certain restricted acts which cannot be undertaken without specific shareholder consent.

Crowdfunding platforms tend to offer standard templates which provide a good starting point for negotiations, but sometimes it will be more appropriate to amend these or to use existing documentation. This will be particularly relevant where a company already has angel or institutional investors.

Negotiating shareholders’ agreements and articles of association can be complicated and may challenge even the most experienced investors and entrepreneurs. Even if no other advice is taken, we would always recommend that you ask a lawyer to carry out a red flag review of the proposed documents to highlight potential areas of risk or concern.

1. Managing the relationship with existing shareholders/investors

Where a company already has a number of existing shareholders and investors, or perhaps is planning to issue shares to investors alongside the crowdfunding raise, quite a bit of relationship management can be required to get the raise over the line.

For example, certain shareholder resolutions will need to be passed to issue new shares and adopt new articles of association, some of which will require the approval of shareholders carrying 75% of the voting rights in the company. This can be a delicate procedure and it can be beneficial to have an experienced legal adviser helping to manage shareholder communications.

1. Making recommendations and introductions

Over time a growing company will often find that it needs increasing levels of external support – whether from accountants, R&D tax credit specialists or industry experts. It will often be appropriate to explore new, experienced additions to the management team.

Law firms tend to be well-positioned to make these recommendations and introductions and are well-placed to offer an opinion about individuals that will be a good fit for your business – both in terms of skill-set and personal chemistry.

1. Sorting out post-completion filings and admin

After the crowdfunding raise has been completed, and the funds have been transferred to the company, there will often be a raft of post-completion administration to deal with.

Given that the founders’ primary responsibility is now to deploy the funds effectively and press on with growing the business, it is often sensible to ask lawyers or accountants to deal with updating company registers, submitting Companies House filings and issuing share certificates, where this is not undertaken by the crowdfunding platform itself. In some circumstances these processes can be complicated significantly by the addition of many new shareholders. At this stage, it may be worth considering appointing an external company secretary.

Investors will want to know that the company is being managed properly – and failure to draw together any loose ends can cause real problems with subsequent fundraising efforts.

1. Supporting post-fundraising growth plans

A successful crowdfunding raise is usually a springboard for various new opportunities and exploits, many of which will require legal assistance. For example, you may be entering into new commercial contracts, introducing new employment contracts, setting up employee share schemes and planning follow-on funding rounds.

As discussed above, there is also the consideration of ensuring that your business plans comply with SEIS/EIS legislation.

1. Financial promotions and crowdfunding

There is a strict regulatory regime which applies to offering investments (including shares) to the public. Even small fundraises are caught by the legislation, whether or not an online platform is used.  This is because when you invite or induce others to engage in an investment activity (for example investing in your company), you fall within what is widely termed ‘the financial promotion regime’.

Whilst the regulation around offering investments to the public and that of financial promotions goes well beyond the scope of this article, it is vital for fundraising companies to grasp that this is a heavily-regulated area, with potential for financial and criminal sanctions if breached. It is also essential to understand that whilst commercial crowdfunding platforms are regulated by the Financial Conduct Authority (FCA), and therefore able to promote their fundraising companies within the parameters prescribed by it, this does not give fundraising companies themselves carte blanche to promote their pitch in whichever way they see fit. This is equally important where the fundraising company is communicating with potential investors outside of the crowdfunding platform, for example via email or social media.

If you have any concerns about financial promotions and crowdfunding, then expert legal advice should be sought at the earliest opportunity.

Next steps: finding a suitable law firm

If you decide that you are going to need some legal assistance with your crowdfunding campaign, the next step is to find a suitable firm. You should check that the firm has sufficient expertise to help you where required, and identify a lawyer you can get on well with and who understands what your company is trying to achieve.

If you are concerned about fees and proportionality, then you should ask your lawyer to quote on a phase-by-phase basis so that you can make an informed decision about those stages of the process with which you most need help.

Michelmores has advised numerous clients raising funds from the crowd, including Mindful Chef (on its campaigns with both Seedrs and Crowdcube) and Velorution. We advised Downing LLP on the launch of Downing Crowd and Triodos, the sustainable bank, on the launch of its own crowdfunding platform.

If you would like to discuss your fundraising campaign with us, then we would be pleased to speak with you. Please contact Harry Trick in Michelmores’ Corporate team.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.

Michelmores’ specialist policyholder Insurance Team is considering launching a series of group actions on behalf of businesses affected by the Coronavirus pandemic who have had their Business Interruption claims declined by insurers.

Our team has currently identified the following insurers, whose policies it believes may respond to the current circumstances:

1. Aviva (in particular Resilience policies)
2. Hiscox / Geo Specialty
3. NFU Mutual (in particular Commercial Select)
4. RSA (in particular, those administered by Eaton Gate MGU Ltd)
5. New India Assurance
6. QBE
7. Ecclesiastical (in particular Historic Britain Insurance)
8. Argenta Syndicate 2121 (in particular those arranged by HIUA)

If your business has business interruption insurance with one of these insurers and you would like to register your interest in a potential group action, please email us at insurance@michelmores.com and provide the following details:

1. Name of policyholder
2. Name of Insurer
3. Copy of Insurance Policy if available

All information provided will be kept confidential and not shared with anyone outside of Michemores LLP.

Garbhan Shanks has consulted with the Financial Conduct Authority (FCA) in respect of their proposed declaratory proceedings and has asked the FCA to include wordings from the above listed insurers as part of their test case.

For more information on our specialist policyholder Insurance Team, visit our website.

Read time: 10 minutes

Amongst the clouds of economic uncertainty, ESG and impact investing shine through

January seems like a lifetime ago. The UK formally cut ties with the EU, Australia continued to battle devastating bushfires, and Harry and Meghan departed for Canada. At the same time, world leaders heralded the arrival of ‘stakeholder capitalism’ in Davos.

“People are revolting against the economic ‘elites’ they believe have betrayed them, and our efforts to keep global warming limited to 1.5°C are falling dangerously short” said Professor Klaus Schwab, Founder and Executive Chairman at the World Economic Forum. “With the world at such critical crossroads, this year we must develop a ‘Davos Manifesto 2020’ to reimagine the purpose and scorecards for companies and governments.”

2020 was declared by Sir David Attenborough as the year of action against climate change in the run up to the UN Climate Change Conference (COP26) in Glasgow this November. However, with global financial markets now in Coronavirus-induced turmoil and COP26 postponed, how will COVID-19 change the outlook for Environmental, Social and Governance (ESG) factors from an engagement and performance perspective?

ESG standardisation of classification

We should acknowledge at the outset, there is a degree of ambiguity about what constitutes ‘sustainable’. Some ESG funds, for instance, work proactively toward certain ESG goals, whilst others simply exclude negative ESG behaviours.

For investors, the absence of a codified ESG structure can mean substantial variations in the performance of different benchmarks. For example, as Investors Chronicle states in its article ESG’s healing power, investors can “treat the ESG scores like any other stock screen metric: as a starting point for further research.”

However, the legal framework is set to become far more rigorous. The EU’s draft Taxonomy Regulation will set uniform ESG benchmarks, require companies to consider sustainability risks and to disclose how ESG is integrated into their investment process.

Investor engagement

As the Wall Street Journal reported,”environmental, social and governance investing was growing in popularity before the virus began to circulate, as investors flocked to companies that have taken steps to manage nonfinancial risks related to matters such as climate change, board diversity or human rights issues in the supply chain.”

We also saw from Michelmores’ own recent Millennials, Money & Myths Survey that there is not only an increasing appetite, but also a sense of duty of responsibility, amongst millennials (as well as older investors) to use their money to have a positive impact on the world.

One might suspect investors would revert to more traditional forms of investment, which may be perceived as ‘safer’, in times of unprecedented market volatility. Only time will tell, but initial signs are positive for the growing role of ESG factors in the global economy.

With interest rates on savings at record lows (at least in the United Kingdom), the variety and scope of broader ESG, and more focused impact investment, opportunities has permitted institutions and individuals alike to marry profit with principles. This approach ensures that investors can align their portfolios with financial and non-financial targets, for instance in respect to climate change, health and education.

Indeed, incorporating ESG criteria into an investment does not have to be a trade-off with financial return. As explained in further detail below, sustainable funds outperformed more conventional funds in the first quarter of 2020, even as the Coronavirus outbreak sent markets crashing.

Acknowledging the potential for fund managers and asset owners to panic and seek to withdraw capital in light of liquidity pressures, as well as declining fee revenues, the UN Principles for Responsible Investing (PRI) urged investors to hold their nerve:

“As for the responsible investment community, it’s time for us to step up and play our role as long-term holders of capital, to call corporations to account. It’s time for asset owners sitting at the apex of the investment chain to lead the financial sector through this crisis. We need to maintain a focus on long-term horizons and support collective action while trying to understand the real issues companies are facing from COVID-19 as well as the flow on effects to our individual portfolios.” Fiona Reynolds, CEO, Principles for Responsible Investment

Accordingly, for the long term, the PRI aims to ensure responsible investors are influential when the recovery process begins. In the short term, amongst seven immediate investor actions, this year’s AGM season is seen as crucial for investors to demand that companies treat their workers, suppliers and customers well through the pandemic.

It appears these demands are high on the priority list. About 66% of shareholder proposals filed for the 2020 voting season deal with environmental and social issues, as opposed to governance topics, stated Nuveen, an asset manager, in a recent proxy voting preview report, whilst 77% of the environmental proposals deal with climate change.

“During the 2020 proxy season, we expect corporations who fail to adequately address ESG issues to face additional scrutiny from stakeholders.” (Nuveen)

Public engagement and scrutiny

There are not only searching questions from investors, but also wider public scrutiny. Record numbers tune in to watch the news, whilst lists of ‘saints’ and ‘sinners’ are compiled daily on social media. One research agency, Populus, reported that “the public are more responsive than ever to what businesses are or are not doing to support the country in its hour of need. The early introduction of elderly shopping hour by Sainsbury’s, for example, has helped to consolidate its position as the business perceived to be handling the crisis best (64% think it is doing well, up from 48% three weeks ago). Dyson has boosted its reputation by responding to the Government’s call to design and produce thousands of ventilators for the NHS at short notice.”

Source: Populus (fieldwork carried out between 3-5 April, among 2,093 members of the public. Showing selected organisations from a wider list)

On the other hand, organisations perceived to be taking advantage of workers, customers or public finances (such as certain other large retailers and football clubs) are in the crosshairs.

Viewpoints on the anticipated adoption of ESG factors

Meanwhile, Barclays makes the following observations in their new ESG research publication:

“Prior to the outbreak of COVID-19, finance was already at a tipping point, where the integration of sustainability concerns was becoming the norm…COVID-19 will accelerate this trend [towards ESG] even further — creating a greater sense of urgency and responsibility toward everything from consumer behaviour to climate change, supply-chain practices and the future of work and mobility — and potentially alter the nature of the investment process as a result.” Jeff Meli, Global Head of Research at Barclays

Aberdeen Standard Investment’s 2020 survey supports this view. Merrick McKay, the firm’s head of European private equity commented: “The general trend suggests that private equity firms are regarding ESG as increasingly important, with firms based in Europe leading the way. There’s still scope for improvement in terms of their ability to measure and monitor against key ESG-related metrics [particularly the UN Sustainable Development Goals] and this is something that we will be encouraging during our discussions with GPs.”

It is clear that the conversation is changing, and even more so during this pandemic. The Aberdeen report shows that ESG awareness is increasing across the private equity world and the PRI points towards high growth in the number of its signatories, particularly from the United States.

We have also seen a social shift in the bond market, through the growing issuance of green, social and sustainability bonds:

“The Coronavirus is a social issue that has brought unprecedented disruption to societies and is impacting the wellbeing of the world’s population. Capital markets are responding to this challenge with more than $9 billion of social bonds issued in the past three weeks, all from supranational entities. However, more can be done, and this presents a great opportunity for governments to follow suit.” Simon Bond, Director of Responsible Investment Portfolio Management, Columbia Threadneedle Investments

Performance

Our Millennials, Money & Myths Survey showed that, whilst affluent millennials feel a responsibility to use their money to have a positive impact on the world, there is a perception that impact investment is less profitable than other types of investment (as shown below).

Indeed, Forbes recently published the first in a series of articles titled Does Impact Investing Always Come At A Price? As you might expect, the answer is complex. According to impact investment researcher and advisor, Rachael Browning, “It is stuck in both the old way of perceiving ‘returns’ and the hope for doing things better in future, in a world that desperately needs ambitious impact-driven capital.”

Although the market is in its infancy, the initial data on returns is positive and counters the pessimistic perception. Pre-Coronavirus, numerous reports showed better or comparable returns for impact investments. Under Coronavirus conditions, investment research firm Morningstar reported that, for the first quarter of 2020, 70% of sustainable equity funds recorded returns in the top halves of their broad-based peer group. Of those, 44% scored within the top quartile. When the full extent of the pandemic became clear in early March, ESG-aware companies outperformed other global stocks by about 7%, HSBC found.

In Europe, a Bank of America study found that the 50 shares held by ESG funds in the most overweight proportion, compared with their size in benchmark indices, beat the most underweighted shares by 10%. Investors Chronicle observes that ESG is not a bull market luxury but, instead, adds resilience to portfolios.

Granted, sustainable funds still suffered heavy losses amid last month’s downturn. However, it is encouraging to see that losses in ‘sustainable’ funds were notably lower compared to traditional funds. Morningstar’s head of sustainability research, Jon Hale, explained that companies that attend to their environmental challenges, treat their stakeholders well, and govern themselves in an ethical way are proving to be more resilient during this crisis.

Charles Stanley, one of the leading investment management companies in the UK, backs up this view in its Investing with Conscience guide:

“There is evidence that some responsible investing approaches can lead to higher shareholder returns. Businesses that address short-term risks whilst adapting to longer-term structural trends should have more chance of success than ones that don’t. Poor environmental, social and governance practices, meanwhile, ultimately might be harmful to a business. Responsible investing means favouring companies that value long-term sustainability, not just short-term profitability, and in the long run that can lead to better long-term returns for shareholders.” Investing with Conscience, Charles Stanley Direct

The future

As Investors Chronicle recognises, before the global pandemic arrived, ESG was the “hot investment topic”. However, we have seen that asset owners such as sovereign wealth funds, large pension funds and endowment funds, have continued to demand that their money is, at the very least, invested in a way that does not exacerbate problems such as climate change – and, hopefully, in a way that helps to solve them.

ESG-conscious millennials, who will soon benefit from one of the biggest generational wealth transfers from their Baby Boomer parents, are looking to invest conscientiously and are looking to the right type of products to facilitate this.

BlackRock, the world’s largest asset manager, says that because flows into ESG investment have so far been in their early stages, “full consequences of a shift to sustainable investing are not yet in market prices – and a return advantage can be gained during this transition.”

The responsible investor may indeed be a financially wise one.

For further information on Michelmores’ Impact Investing practice, please contact Joe Whitfield.

This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.

In the recent case of Mears Ltd v Costplan Services (South East) Ltd , Plymouth (Notte Street) Limited and J.R. Pickstock Limited [2019] EWCA Civ 502, the Court of Appeal (CA) has provided probably the most authoritative statement on what constitutes practical completion for over 50 years.

What is the purpose of “Practical Completion”?

“Practical completion” in the context of construction is of course generally understood as being the stage that physical construction works on a project are complete. This will generally mark the point where liquidated damages can no longer be claimed for any delay to the works and when generally the risk of any damage to the works tends to pass from the contractor to the employer.  Practical completion is also significant in that it can trigger certain payments such as the release of retention  and the commencement of the final account process.

Practical completion can also of course have implications for parties who are outside the building contract; in the Mears case it was the trigger for a potential lessee under an Agreement for Lease (“AFL”) to enter into that lease.   Practical completion is often very fact dependent and requires assessment on a case-by-case basis. Some new judicial guidance on the relevant factors is therefore useful and overdue.

What happened in this case?                              

Plymouth (Notte Street) Limited (“PNSL“)  engaged J.R. Pickstock Limited (“Pickstock“), to design and build two blocks of student accommodation in Plymouth, under an amended JCT Design and Build 2011 form (“the Building Contract”).  .

Mears Limited (“Mears“), whose activities include the management of student accommodation, entered into an AFL with PNSL with the intention that Mears would take a lease of the accommodation after practical completion.

The AFL provided that PNSL would undertake the Landlord’s Works set out in the Building Documents, which included the Employer’s Requirements under the building contract.  Clause 6.2.provided:

“6.2. The Landlord shall not make any variations to the Landlord’s Works or Building Documents  which:

6.2.1.    materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property; or

6.2.2.    result in materially increased maintenance costs or increase the frequency of component replacement cycles; or

6.2.3.    are substantial or material.”

In the AFL, “Certificate of Practical Completion” was defined as “A certificate issued by the Employer’s Agent to the effect that practical completion of the Landlord’s Works has been achieved in accordance with the Building Contract”.  Furthermore, clause 14 provided that “The Landlord shall use reasonable endeavours to procure that the Employer’s Agent does not issue a Certificate of Practical Completion without previously giving [Mears] not less than 5 working days’ notice that he proposes to carry out an inspection on a date specified in the notice with a view to issuing the Certificate of Practical Completion”, but also, crucially, that.  “…the issue or non-issue of the Certificate of Practical Completion is to be in the sole professional discretion of the Employer’s Agent”.  In the usual way, AFL clauses 3 and 22.1 provided that 5 days after the certification of practical completion, PSNL would grant to Mears, and Mears would execute, a lease in the terms annexed to the AFL.

As matters transpired, 56 (out of 348) of the rooms were more than 3% smaller than shown on the original drawings.  This defect could not be remedied by PNSL, unless it were to demolish and rebuild the accommodation.

Mears claimed that any breach of the 3% size threshold would amount to a “material and substantial breach” of the AFL, which would mean that (a) Mears could terminate the AFL; and (b) Costplan Services (South East) Ltd,  the Employer’s Agent retained by PNSL (“Costplan“) would not be able to validly certify that practical completion had occurred.

Costplan notified Mears that they planned to visit the site for a pre-completion inspection, with the intention of certifying practical completion. Mears obtained an injunction to prevent Costplan certifying practical completion, pending the substantive dispute being resolved in the TCC.

Whilst Costplan accepted the fact that, under clause 6.2.1, a 3% reduction in room size was deemed to be a “material” variation so as to amount to a breach of contract,it argued that this did not of itself mean that the breach would be “material”so as to prevent practical completion from being certified.

What did the TCC decide?

Waksman J in the TCC disagreed with Mears and discharged the injunction. In a reserved judgment handed down on 7 December 2018  he distinguished “a material variation” from a “material breach”. The learned judge commented as follows:

“30. The deeming provision in Clause 6.2.1 is not surprising. It avoids, in one important area of the works, a dispute as to what deviation should be regarded as “material”. And it ties the areas down to those shown in the Building Documents. Materiality, therefore, whether deemed by Clause 6.2.1 or otherwise, goes to the extent of the variation which has occurred. Unless material “or substantial” any such variation does not amount to a breach. But if it does, the fact that there has been a material variation says nothing about the extent or importance of that breach to the Property or works as a whole.

31. Accordingly, the fact that there is a material variation for the purposes of Clause 6.2.1 does not mean without more that the resulting breach is itself material or substantial. In contending that it does, it seems to me that Mears is eliding these two quite different concepts: (a) the scale of the variation and (b) the scale of any resultant breach.”

Waksman J also observed that it would be “commercially absurd” if any breach of the 3% threshold could entitle Mears to terminate the AFL and render practical completion impossible. Furthermore, he rejected Mears’ argument that practical completion was impossible because the defects could not be remedied.

5 days after Waksman J’s judgment, Costplan issued its certificate of practical completion. Mears appealed Waksman J’s decision not to maintain the injunction that was preventing practical completion.

What did the Court of Appeal decide?

The CA agreed with Costplan’s interpretation of clause 6.2.1finding that this breach of contract would not of itself be “material”, and  upholding Waksman J’s earlier decision.   Delivering the leading judgment Coulson LJ (the most senior construction judge in England and Wales) stated at paragraph 38 of his judgment that, “…it would be commercially unworkable if every departure from the contract drawings, regardless of the reason for, and the nature and extent of, the non-compliance, had to be regarded as a breach of contract”.  The CA could not accept the prospect of even trivial breaches being deemed material so as to enable termination by Mears.   Coulson LJ went on to observe that:

“41.      …the parties were not saying that the resulting breach of contract was itself “material”. The words of clause 6.2.1 do not say that. Materiality is introduced only in relation to room size (“materially affect the size”), and not in relation to the resulting breach. There is nothing in clause 6.2.1 which addresses the character or quality of the breach. The clause simply provides a mechanism by which a breach of contract can be indisputably identified.

Coulson LJ commented that to suggest (as Mears were doing) that one trivial failure would amount to a material breach would create a “very uncommercial result” and to use the words of Counsel represented an “absolutist argument”. He went on to say that clear words would be necessary for such a draconian result and said that there were no such words in clause 6.2.1.

It is worth noting that Coulson LJ did add, however, that it is possible for parties to agree controls on how a certifier may exercise their discretion in certifying practical completion.

What constitutes Practical Completion?

The wider significance of the CA decision lies in Coulson LJ’s summary of “the law on practical completion” where he set out some relevant principles at paragraph 74 of his judgment:

1. “Practical completion is easier to recognise than define… There are no hard and fast rules“[1];
2. “The existence of latent defects cannot prevent practical completion… In many ways that is self-evident: if the defect is latent, nobody knows about it and it cannot therefore prevent the certifier from concluding that practical completion has been achieved“[2];
3. “In relation to patent defects, the cases show that there is no difference between an item of work that has yet to be completed (i.e. an outstanding item) and an item of defective work which requires to be remedied. Snagging lists can and will usually identify both types of item without distinction“;
4. Practical completion will not be prevented, “[where] the works have been completed free from patent defects, other than ones to be ignored as trifling“[3]
5. “Whether or not an item is trifling is a matter of fact and degree, to be measured against ‘the purpose of allowing the employers to take possession of the works and to use them as intended’ [as held in Jarvis]…. However, this should not be elevated into the proposition that if, say, a house is capable of being inhabited, or a hotel opened for business, the works must be regarded as practically complete, regardless of the nature and extent of the items of work which remain to be completed/remedied… In consequence, I do not consider that paragraph [187] of the judgment in Bovis Lend Lease, with its emphasis on the employer’s ability to take possession, should be regarded (without more) as an accurate statement of the law on practical completion “[4]; and
6. “Other than Ruxley, there is no authority which addresses the interplay between the concept of completion and the irremediable nature of any outstanding item of work.  And even Ruxley is of limited use… [and] does not support the proposition that the mere fact that the defect was irremediable meant that the works were not practically complete“[5].

In this case, because there were no contractual controls on what practical completion must look like,  it was a matter for Costplan to exercise its discretion in determining whether or not the breach of contract was “trifling or otherwise” in deciding whether to certify practical completion.  Coulson LJ added that the ability of the accommodation to be used for its purpose did not, by itself, mean that practical completion had occurred.

In addition, the fact that a defect could not be economically remedied is irrelevant; it simply depends on whether that defect was “trifling“.

What does this mean for your business?

Despite noting that there is no hard and fast rule for determining practical completion, this decision demonstrates that practical completion may be prevented by the presence of patent defects (not latent defects) which are more than “trifling“.

This will require consideration by the certifier of the manner in which the contractor has achieved what it was contractually engaged to achieve and the actual  purposes of the building or works.  This should include consideration of the fact and degree of any defects but should ignore whether or not those defects can be economically remedied.  The ability to remedy a defect will however still be a relevant consideration when measuring loss suffered by the Employer.

When drafting building contracts, care should be taken where practical completion is concerned to make clear the parties’ intentions relating to defects (including unauthorised variations) .  This, often, will depend on the nature of the building or works in question.  A clear and traceable line of drafting from the identification of a defect through to a prohibition on the achievement of practical completion will be necessary to create “condition precedent” to the certification of practical completion. Any documents required, such as collateral warranties, building control certificates and the provision of as-built drawings and Operation and Maintenance manuals can also be added as pre-conditions for the achievement of practical completion.  The definition and mechanics of “practical completion” will have significant consequences so expert legal advice should be obtained.

Prospective lessees often scrutinise the specification for the buildings they intend to occupy, and may even have the opportunity to be involved in its preparation.  They also routinely insist on collateral warranties from the builder and the professional team.  These documents are often appended to the AFL. However, the same level of care is not always taken when considering the terms of the building contract itself, despite the fact that practical completion is typically the trigger (amongst other things) for entry into the lease itself.  Following the decision in Mears, prospective lessees who wish to have the opportunity to reject premises because they are not constructed in accordance with the specification must take care to ensure that the AFL specifies not only what is a material breach, but also that such breaches will excuse it from entering into the lease.  This should in turn compel the employer/lessor to ensure that conditions for practical completion are more tightly defined in the building contract.

If you require advice in relation to issues in connection with practical completion, or indeed any construction related query, please contact chris.hoar@michelmores.com or neil.mason@michelmores.com or any other member of the Construction and Engineering Team.

Breaking news for employers 20 April 2020

Applications for reimbursement under the Job Retention Scheme are open today.

The online service to make a claim opened today (20 April) at 5:30am. We are aware that some organisations have already been able to gain access to the portal, and have reported it as easy to use. We understand that the system crashed for some users (although not all) at around 7:20am. It is likely that HMRC will be trying to restrict the number of users actively making a claim at any one time, in order to keep traffic down and avoid overloading the system entirely.

You can access the service through the Government Gateway.

To assist with applications, the Government has published a guide, entitled “Claim for your Employees’ Wages through the Coronavirus Job Retention Scheme (CJRS) – A step-by-step guide for employers”. You can find a copy of the guide here. There is also further advice available in some pre-recorded webinars, which can be found on the Government’s Youtube channel – the link to these is contained in the guide. Some key points are as follows:

• The information that employers will need to have to hand before making a claim is:
  • The number of employees being furloughed.
  • The start and end dates of the employees’ furloughing period.
  • The name and National Insurance Number of each furloughed employee.
  • The employer’s PAYE scheme reference number.
  • The employer’s Corporation Tax Unique Taxpayer reference, Self-Assessment Unique Taxpayer reference or Company Registration number.
  • The employer’s UK bank account details.
  • The employer’s registered name.
  • The employer’s address.
  • The relevant amount being claimed for reimbursement, including contributions for employer NICs and employer pension contributions (up to 3%).

• For those employers claiming for more than 100 employees, the claim information will need to be uploaded in one of the following formats: XLS, XLSX, CSV, ODP.
• HMRC will be providing a claim calculator, to allow employers to check the amount they are claiming (we do not have more information about this, as yet). There is also some newly published guidance on calculating the 80% of wages, which includes further, welcome clarification on overtime and commission payments (see the section “What to include when calculating wages”)
• To access the system on gov.uk, employers will need to have a Government Gateway ID and password, and an active PAYE enrolment. If an employer does not have these, they can register for them here and here.
• The application needs to be completed in one session – there is currently no save and return option. Sessions will time out after 30 minutes of inactivity.
• Employers will receive payment six working days after making an application – keep hold of the claim reference number (by, for example, printing out the confirmation screen) in case contact needs to be made with HMRC if funds are not received (the Government is requesting that HMRC is not contacted unless it has been more than 10 working days since the claim was made).
• Employers should retain the calculations that form the basis of their claim in case further information is required by HMRC.

Recap of news issued in our briefing of 17 April 2020 – extension to Job Retention Scheme

On Friday afternoon (17 April), HM Treasury announced that the scheme would be extended for a further month, from 31 May 2020 to the end of June.

This change is more than likely to be in response to pressure from large businesses, many of which had identified a need to make major redundancies at the end of the furlough scheme. Based on the original duration of the scheme, these organisations were due to commence the requisite 45 days’ collective redundancy consultation on Friday, in order to comply with the legislation in respect of 100 or more redundancies.

It is also consistent with the extension to the lockdown measures, which was announced on Thursday 16 April. Given that the ability to do business is still extremely restricted, and will be so for at least a further three weeks, the Government is continuing to protect jobs at least until the end of June, as “it is vital for people’s livelihoods that the UK economy gets up and running again when it is safe to do so” (Rishi Sunak, Chancellor of the Exchequer).

Annual leave and furlough

On Friday evening (17 April), the Government updated the employees’ guidance to the scheme in respect of annual leave and, notably, not the employers’ guidance, which would obviously be the first port of call for businesses. As this change might be missed by many of our clients and contacts, we would like to draw it to your attention, here.

The employees’ guidance now states:

• Whilst an employee is furloughed, they will continue to accrue annual leave as per their employment contract. This is the advice we have been giving to clients since the scheme has been in place, but is welcome clarification.
• Employer and employee can agree to vary holiday pay entitlement as part of the furlough agreement; however, almost all workers are entitled to 5.6 weeks of statutory paid annual leave each year, and cannot go below this figure.

This seems to suggest (although admittedly it is not clear) that employers can agree with their employees to vary the amount of holiday entitlement which accrues during furlough. However, it is important to note that 1) employees will have to provide their express consent to this, given that it will be a change to their contractual terms, and 2) as the guidance suggests, employers and employees cannot seek to contract out of the statutory leave entitlement of 5.6 weeks.

• Employees can take holiday whilst on furlough. Working Time Regulations (WTR) require holiday pay to be paid at employees’ normal rate of pay or, where their rate of pay varies, calculated on the basis of the average pay they received in the previous 52 working weeks. Therefore, if employees take holiday whilst on furlough, they should be paid their usual holiday pay in accordance with the WTR.

Employers will be obliged to pay the additional amounts over the grant, although they will have flexibility to restrict when leave can be taken if there is a business need. This applies for both the furlough period and the recovery period (the latter is not defined, but is presumably such period after the lockdown has been lifted when business is returning to normal). It is important to note that, even in the absence of this guidance, employers are entitled, by law, to refuse an employee’s holiday request due to business need. The ability of employees to take holiday whilst on furlough previously looked doubtful, as it seemed to be at odds with the ‘primary purpose’ of the employees being away from work, as this was due to the effect of Coronavirus (COVID-19), rather than a ‘period of rest’, as prescribed in the WTR.

In addition, there was some doubt as to whether a period of holiday would interrupt the necessary 3-week minimum period of furlough in order to be eligible for reimbursement. However, it has now been directed by the Government that holiday can be taken during furlough, although it is important that employers ‘top-up’ any holiday pay to 100% of employees’ normal salary.

They can seek reimbursement for the 80% under the scheme, but will need to fund the remaining 20% themselves. It is still not clear whether employers can direct that employees take holiday during furlough, or whether they can just accept requests which are made by employees. The guidance does not answer this, and it is a subtle, yet important, distinction.

At present, the vast majority of employment lawyers and barristers consider that employers cannot require employees to take annual leave during a period of furlough, as it contradicts the purpose of such leave under the European Working Time Directive. It is likely that we will receive clarification on this, and other elements of the interaction between annual leave and furlough, as the Government has expressly stated that “during this unprecedented time, we are keeping the policy on holiday pay during furlough under review”.

‘Confirmation in writing’ requirement under the Treasury Direction

In last week’s Treasury Direction, it was stipulated that, in order for an employee to be furloughed, employer and employee ‘must have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment’. This is contrary to all of the iterations of the Government’s employer guidance, including the current version, which states “to be eligible for the grant, employers must confirm in writing to their employee confirming that they have been furloughed…there needs to be a written record, but the employee does not have to provide a written response“. We explained about this in our update of 16 April.

Throughout the life of the scheme so far, we have been advising our clients and contacts to obtain express written consent as a ‘belt and braces’ approach, although, until the publication of the Treasury Direction, this was not strictly required. For those employers who have not sought express written consent, we would advise obtaining retrospective consent wherever possible.

Given the understandable confusion that this clarification has caused some employers, who have been dutifully following the Government guidance, it is likely that further commentary on this point will be issued in the forthcoming days. Interestingly, even since the issuing of the Treasury Direction, the Twitter account of HMRC Customer Support has still been responding to queries with the advice “once agreed, the employer must notify the employees in writing that they have agreed to be furloughed, but there is no need for the employee to respond confirming their agreement“. Whilst we cannot rely upon a tweet from HMRC’s Customer Support function, it could be an indication of forthcoming guidance on this issue.

Other news

Creation of the Statutory Sick Pay (General) (Coronavirus Amendment) (No.3) Regulations 2020

The previous version of the regulations, which were last updated on 16 March 2020, presented a wholly unsatisfactory position. Whilst the purpose of the regulations was to expand the eligibility for Statutory Sick Pay (‘SSP’) so that, in addition to those individuals who were unfit for work, it covered those who were social distancing, the regulations only referenced the social distancing / isolation guidance of 16 March 2020.

This had the (perhaps unintended) effect that, in addition to those individuals who were sick, the only other categories of individuals eligible for SSP were those who were self-isolating either because they were showing symptoms of Coronavirus (COVID-19), or they lived with someone who was. The regulations excluded those who were social distancing or shielding as a result of their vulnerable status.

The new regulations appear at least to partially address that problem, by providing that a person is deemed to be incapable of work if they are unable to work because they fall within the extremely vulnerable category and have been advised to shield. There is no mention of those individuals who are advised to stay at home because they are over 70 or have a less severe pre-existing health condition. The regulations came into force on 16 April 2020 and, at present, it does not appear that they have retrospective effect. Therefore, it seems that shielding employees will only be entitled to SSP from 16 April 2020 onwards.

[CONTENT CORRECT AS AT 20 APRIL 2020]

If you would like to discuss any of the issues raised in this briefing, or have other concerns about the impact of Coronavirus, please contact Rachael Lloyd, James Baker or Andrew Tobey in Michelmores’ Employment team.

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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.

As the marine licensing regime approaches its fifth anniversary, Andrew Oldland KC, Danica Cooper and Nicola Canty consider an eventful year in the field

In English waters and the offshore areas of Wales and Northern Ireland, the Marine Management Organisation (“MMO”) has, since April 2011, been the regulatory body responsible for issuing marine licences on behalf of the secretary of state for environment, food and rural affairs, under Part 4 of the Marine and Coastal Access Act 2009 (“MCAA”).

A marine licence is required for licensable activities taking place up to the mean spring high-tide water mark, including: the construction, alteration or improvement of any works in or over the sea, or on or under the seabed; and the removal of any substance or object from the seabed. This means most marine maintenance activities except those carried out by or on behalf of a harbour authority.

The complex process for obtaining the required consents for coastal developments was outlined in a previous article (Marine licences: worse things happen at sea, 12 April 2014, p66) but the past year has seen a significant policy change with the introduction of a recovery mechanism with effect from 1 October 2015.

When the secretary of state steps in

The secretary of state will make the final decision on whether the specified criteria to trigger the recovery of marine licensing determinations are met, and consequently whether that application should be determined by the secretary of state, rather than the MMO, with the Planning Inspectorate managing the inquiry process.

A formal representation from an affected local planning authority (“LPA”) or an inshore fisheries and conservation authority (“IFCA”) is usually required, in addition to the marine licence application itself relating to activity which: falls within band 3 of the Marine Licensing (Application Fees) Regulations 2014; is located in the inshore region; and is capable of having a significant effect. However, ministers may also decide to determine cases involving novel activities of national significance where there is no, or insufficient, planning policy guidance.

The Department for Environment, Food and Rural Affairs (“DEFRA”) intends that the recovery policy will be highly selective to avoid disproportionate uncertainty and delay, and will only be used for decisions “which genuinely merit going to inquiry”. The impact of the policy will be reviewed by DEFRA after 12 months, and it remains to be seen whether optimistic estimates for the costs of the change are realistic.

Harbour redevelopments

From 1 October 2013, changes to the Harbours Act 1964 (as amended by section 6 of the Marine Navigation Act 2013) have made it possible for statutory harbour authorities (“SHAs”) to apply for harbour closure orders to enable an SHA to be relieved of either all or certain specified statutory harbour functions without the need for legislation. Such applications follow a similar procedure to that of harbour revision orders, except that the process is managed by the Department of Transport (“DfT”) rather than the MMO.

Draft statutory guidance sets out the key criteria to be considered as part of the decision-making process and was consulted on by the DfT in autumn 2015; the finalised guidance is expected in 2016. The new regime will make it much easier to close harbours which are no longer commercially viable, but may give rise to potentially complex economic arguments on viability. It is expected that local authorities which manage numerous small and uneconomic harbours are likely to take advantage of these changes.

Coastal concordat and regional marine licences

Once closed, harbours may well be prime opportunities for property developers. The coastal concordat aims to streamline and co-ordinate the consenting process by providing a single point of entry for applicants, who are then guided to other regulators responsible for additional consents required. LPA engagement with the coastal concordat is improving but remains inconsistent, despite the MMO’s efforts over the past year to encourage more LPAs to sign up.

2015 also saw the emergence of regional licences for multisite applications. This is a further cost-effective option being encouraged by the MMO whereby applicants submit a single application for a 10-year licence that applies to multiple sites in an ecologically coherent area, where the activities applied for are generally lowimpact maintenance activities.

The intention is to reduce the administrative burden, time and cost of applying for numerous licences separately, while various advisory bodies also have the opportunity to address their concerns and suggest conditions to the proposed licence in an efficient manner.

Marine conservation zones

In January 2016, the UK government designated 23 marine conservation zones (“MCZs”) in the second tranche of designated sites in English inshore and English and Welsh offshore waters, resulting in a total of 50 protected sites. A third consultation on the final tranche of potential MCZ sites is expected in 2017, for designation in 2018.

In determining marine licence applications under section 126 of MCAA, the MMO is required to consider whether the activity is capable of affecting (other than insignificantly) the protected features of the MCZ or any ecological or geomorphological process on which the conservation of any protected feature of an MCZ is dependent. In order to meet this obligation, the MMO has introduced a MCZ assessment process into its decision making procedures.
The new sites are also relevant to coastal LPAs and IFCAs, all of which have a duty to exercise their functions to further – or, if that is not possible, at least hinder – the conservation objectives of a particular MCZ.

Trouble on the horizon?

Marine licensing is a fast-evolving area of planning. The MMO continues to work towards a more streamlined, transparent and effective marine licensing regime which would reduce both costs and uncertainty for applicants and increase fairness. However, the decision by DEFRA to claw back some of the more complex marine licensing decisions is undoubtedly a blow for an organisation which has struggled with a shortage of key personnel and an ever-burgeoning workload.

With the renewables market in the midst of what appears to be an ongoing run of bad news (closure of FITs, Capacity Market suspension, Targeted Charging Review…) the term “corporate PPAs” is often bandied about with trend-bucking optimism. Increasingly seen as a way to improve the viability of power projects financed without the support of Government subsidies, corporate PPAs – or, more specifically, corporate and industrial power purchasing agreements – are becoming increasingly common.

However, much of the commentary surrounding corporate PPAs is directed to those corporate and industrial (C&I) entities with very large-scale offtake requirements and well-resourced energy procurement teams; the Amazons and Googles of the world. This presumes a certain level of sophistication in energy management that medium-to-large C&I entities do not have, or frankly, need.

This article will take a step back to deal with the fundamental question of “What is a corporate PPA?” and explain how it can be distinguished from the forms of PPA with which many medium-to-large C&I entities will be more familiar: utility PPAs and private-wire agreements.

What is a corporate PPA?

A corporate PPA is any agreement made directly between a generator and a corporate or industrial (C&I) offtaker for the purchase of power.

As a category this captures a wide range of legal relationships relating to the purchase of power.  When used in the context of financing or developing an energy generation project, it usually refers to an agreement whereby a large corporate entity purchases power from a generator which is located at a site different to that of the corporate purchaser.  If a C&I entity purchases power from a generator which is located at the same site, that is usually referred to as a “private-wire” arrangement.

Why enter into a corporate PPA?

The reasons for entering into a corporate PPA vary. In some instances, price will be the motivating factor. But more often than not, a corporate PPA provides security of supply at a competitive price for a longer period than the spot market offers.  Also, when the source of electricity is renewable, it offers an opportunity for the entity (known as an offtaker of the power) the opportunity to demonstrate its environmental credentials. For the generator, where Government subsidies had previously provided a predictable long-term revenue stream, a corporate PPA gives that generator an element of known revenue.

What types of corporate PPAs are available?

The main differences in corporate PPAs arise in relation to the way in which the contract addresses the fact that the offtaker and the generator are located at different sites.  This means the generator is connected directly into the electricity distribution network and not to the offtaker (unlike a private-wire arrangement – see below). Broadly speaking, corporate PPAs address this in one of two ways:

1. “Sleeved” corporate PPA

A sleeved corporate PPA provides a way in which the parties can buy and sell the power produced by the generating asset where the generator and the offtaker are on the same network, but not in the same place. For this structure to be available, the generator and the user must both be connected to the distribution network.

Under this approach, the generator and the offtaker enter into a power purchasing agreement.  The offtaker agrees a price with the generator which relates to the power generated by the relevant asset. An electricity supplier/ utility is appointed as the intermediary between the generator and the offtaker. The corporate PPA will also deal with the entitlement to any renewable energy certificates (or other benefits).

The offtaker and the electricity supplier/ utility then enter into a separate back-to-back power purchasing agreement. This back-to-back PPA will often mirror the majority of the provisions from the original PPA so as to ensure there is no conflict or additional risk introduced by having a sleeved corporate PPA structure.

The generator sells its power to the offtaker who then sells it to the electricity supplier/ utility.  The electricity supplier/ utility manages the delivery of that power from the electricity distribution network to the offtaker and sells the power back at the final offtake point, charging the offtaker a sleeving fee.  The generator receives the agreed power price from the offtaker.

This type of corporate PPA is often used in the UK.

2.    “Synthetic” corporate PPA

A synthetic corporate PPA does not require the involvement of the energy supplier. It is a purely financial structure with no physical delivery of power. This means it provides more flexibility with its structure than a sleeved PPA, but usually means it is more complex.

Under this approach, the generator enters into a standard PPA with an electricity supplier/ utility at the spot price. In parallel, the generator and the offtaker enter into a separate synthetic corporate PPA incorporating a “strike price” at which the parties are looking to fix the cost of the power as between themselves. The synthetic corporate PPA then operates as a financial hedge (whether as a contract for difference or option) where, depending on the spot price at a given time, the generator or the offtaker will pay the other the difference between the spot price and the strike price.

A synthetic PPA is a financial derivative, where the parties agree that they will pay each other a balancing payment so each party should receive the agreed financial result.

What is the difference between a corporate PPA and a private-wire PPA?

In contrast to corporate PPAs, private-wire arrangements are more commonly entered into by medium-to-large (and even small) sized C&I entities. Private-wire, or “behind-the-meter”, arrangements are commonly used where those C&I entities are located on land adjoining energy generation assets.  The assets generate power which is delivered directly to the offtaker, and not via the electricity distribution network.

Power can be sold directly from generator to offtaker, often at a price well below the market rate.

Private-wire arrangements tend to be less complex than corporate PPAs.  This is because private-wire PPAs relate to power moving directly from the generator to the offtaker and therefore are unlikely to need complex price balancing arrangements (given there is no spot price interaction)

What are the common pitfalls in corporate PPAs and private-wire PPAs?

There are common pitfalls in agreeing the terms of power purchasing agreements that will apply regardless of whether you are dealing with a corporate PPA or a private-wire PPA. Contracted supply, outages, maintenance, metering arrangements and pricing all need to be considered closely to ensure both parties achieve the intended commercial outcome, balance risk appropriately and apportion liability. With any supply of electricity arrangements, it is essential to navigate the regulatory framework and care must be taken to ensure the arrangement is compliant.

What is the difference between a corporate PPA and a utility PPA?

A utility PPA, or power purchasing agreement with an energy supplier, differs both a private-wire and corporate PPA. A utility PPA is the most common form of PPA, whereby a generator enters into an agreement with an energy supplier/ utility for that energy supplier/ utility to purchase the power generated by that asset.  The contract will provide that the generator delivers the power to the electricity supplier/ utility where the generation project physically connects to the electricity distribution network (or for certain, larger generation projects, the national transmission network). These forms of PPA are in in standard form for most energy suppliers, and all but the largest generators find it difficult to obtain any movement on the terms of these PPAs from their energy supplier counterparties.

What opportunities are there for Corporate PPAs with medium-to-large C&Is?

For medium-to-large C&I entities which are looking for a way to improve their green credentials, and support renewable energy uptake in the UK, renewable energy-backed corporate PPAs may provide an interesting route for the future.

As it stands, offtakers are limited by the offering of energy suppliers.

However, the opportunities for corporate PPAs for medium-to-large C&I entities will depend on how the market addresses some of the key concerns of generators, funders and offtakers, including:

1. Counterparty covenant strength: naturally any person looking to fund a power generation asset will look at the ability of that asset to generate income.  The funder will need to be sure that the corporate offtaker has the financial wherewithal to satisfy its payment obligations to the generator for the full term of the corporate PPA.
2. Term: those corporate PPAs currently being agreed in the market to secure income for new-build generation assets tend to have a term of 10+ years. For any corporate entity this is a long period, and the directors will need to consider whether it is in the best interests of the offtaker to do so – taking a view on future of power prices over that period.

We expect in the longer term for there to be increasing opportunity for engagement by medium-to-large corporate and industrial businesses with the corporate PPA market, as renewable energy subsidies fall away and generators look for alternative revenue streams to secure funding. Whilst this may end up being a slow process, medium-to-large corporate and industrial businesses would be well advised to keep their eyes open to the opportunity that these contractual structures present for energy procurement.

The Michelmores Energy team has experience advising on a range of PPA structures and would be happy to discuss how corporate PPAs, private-wire arrangements or utility PPAs may work for your business.

As the Coronavirus pandemic continues to spread across the globe, businesses are being required to address the burning (and often existential) issue of what measures to take during the forthcoming period of uncertainty. In his announcement on 23 March 2020, the Prime Minister introduced stricter measures in an attempt to slow the spread of the virus including only travelling to and from work where “absolutely necessary”.^[1]

This announcement has left unanswered questions for those in the construction industry and the Government is now facing pressure to act to protect construction workers against the Coronavirus risk.^[2] This article examines the steps to consider in addressing both the health and economic challenges posed by COVID-19.

Health and safety

In an attempt to address the confusion surrounding the Coronavirus measures, the Cabinet Office Minister, Michael Gove, explained on 24 March 2020 that construction operatives could continue to work, so long as they practised “safe social distancing measures”.

It is difficult to reconcile this rather unusual suggestion with the practicalities of working on-site. Heavy tools and equipment, for example, need to be handled carefully to avoid injuries and remaining two metres apart simply increases the risks of working on building sites. Unless realistic measures are introduced, projects across the country are likely to reach a standstill to combat the virus. Indeed, two of the UK’s major house builders, Bellway plc and Persimmon plc, announced on 25 March 2020 that they would be shutting down their sites following the Coronavirus lockdown measures.

Practical suggestions

If businesses in the industry have not already done so, now would be a good opportunity to review, and perhaps update, their own health and safety policies. The health and safety of the workforce is of the utmost importance and COVID-19 is a complex virus which will take many months to overcome.

Whilst the CDM Regulations ensure compliance with health and safety procedures, businesses should be encouraged to ensure that appropriate procedures are put in place which will enable work on-site to continue if infection is reported locally. This is the case even if the industry shuts down and subsequently re-opens because the risk of infection remains particularly high given the large number of people working on building sites.

If the industry does shut down, businesses should consider appointing a designated group of individuals to monitor the development of the virus and ensure that they keep up-to-date with the Government’s advice and recommendations. In the coming months, this may help businesses plan a return to work.

The Common Law position – Frustration

Delays in practical completion, increases in the cost of a project and possible changes to the scope of works are just some of the possible impacts of Coronavirus. In circumstances where events outside the control of both parties result in the contract becoming “radically different” to what was originally contemplated, the only directly applicable doctrine in English Law upon which a contract may be discharged is Frustration.^[3]

An event which “frustrates” a contract results in it becoming commercially or physically impossible to perform. Historically, the doctrine has been narrowly defined when applied in construction disputes. The courts’ approach towards such arguments is that the parties are strictly liable for the performance of their contractual positions and there is a particularly high threshold to meet before a contract is considered to be frustrated. Parties are more likely to succeed in securing a remedy under a carefully drafted force majeure clause. (For more information on Frustration and force majeure in the context of Coronavirus, see also: Coronavirus and Property Development)

Contractual remedies: Force Majeure

Force majeure is a Civil Law concept and will only apply where expressly provided for in contracts. It refers to a “superior force” outside of the parties’ control that commonly allows a party to suspend (or terminate) the performance of its obligations because it is effectively prevented from fulfilling them. Both JCT Contracts and NEC Contracts deal with force majeure-type events differently.

JCT contracts: Relevant Events and termination

Important distinctions

A Relevant Event is an event which causes a delay to the completion date of a project. Readers should not confuse Relevant Events (which entitle the contractor to an extension of time) with Relevant Matters (which entitle the contractor to claim for loss and expenses). Force majeure is not a Relevant Matter and so no loss and expense is payable to the contractor.

Extension of Time

Clause 2.26.14 of JCT Design and Build 2016 Edition refers to force majeure as one of the Relevant Events entitling the contractor to a fair and reasonable extension of time for completion of the works (albeit no entitlement to additional payment). No further definition of what constitutes a force majeure event is however provided and there is room for debate as to whether the current situation falls within the ambit.

Termination

JCT contracts also provide suspension and termination rights. In particular, clause 8.11.1 of the JCT Design and Build contract allows either party to terminate the contractor’s employment under the building contract as a result of force majeure. The right of termination is not a unilateral right, however. Work must have been suspended for the relevant period stated in the Contract Particulars beforehand; the JCT default position being two months.

Following the period of suspension, the party wishing to terminate should serve notice on the other stating that, unless suspension ceases within seven days after receipt of that notice, he may terminate the contractor’s employment. If the suspension continues beyond seven days, a second notice should be served and termination of the contractor’s employment takes effect on receipt of this second notice.

Considerations

Parties should therefore exercise caution and adhere to notice requirements when asserting that a force majeure event has occurred. The burden of proof is on the party seeking to rely on the force majeure clause and any tribunal is likely to pay particular attention to a party’s exercise of termination rights and whether this is justifiable.

This is particularly relevant given the contractual obligations on contractors in connection with extensions of time. Clause 6.1 of the JCT Design and Build Contract, for example, requires a contractor to “constantly use his best endeavours to prevent delay in the progress of the Works or any Section […] and to prevent the completion of the Works or Section being delayed or further delayed beyond the relevant Completion Date”.

Other Relevant Events

As outlined above, the Government continues to face mounting pressure to protect workers in the construction industry. Depending on the Government’s response, clause 2.26.12 of the JCT Design and Build Contract may provide relief to contractors.

A Relevant Event under this clause is defined as the “exercise … by the UK Government or any Local or Public Authority of any statutory power that is not occasioned by a default of the Contractor … but which directly affects the execution of the Works“.

The wording is clear, however. The measures/restrictions must be implemented (which have a direct effect on carrying out construction works) before this clause can be relied upon. At the present time, contractors may struggle to rely on this clause if there is a shortage of staff on-site because the Government has advised that construction workers can continue their operations. If, however, the Government responds to the pressure by extending its work-from-home measures to the construction workforce, or orders the closure of all construction sites, contractors may succeed in arguing that a Relevant Event has occurred and may be able to claim for an extension of time (but not loss and expense).

A further example would include if the employer was taken ill after contracting Coronavirus and was unable to provide instructions to the contractor. A contractor may be able to argue that is an impediment and/or prevention by the employer amounting to a Relevant Event under clause 2.26.6 and also a Relevant Matter under clause 4.21.5 of the of JCT Design and Build contract. Under these circumstances, a successful contractor would be entitled to both an extension of time and loss and expense.

NEC Contracts: Compensation Events and Termination

Compensation Events

The concept of force majeure is not recognised under either the NEC 3 or NEC4 contract. Instead, “compensation events” operate to grant the contractor additional time and money. There are a number of compensation events which could be triggered as a result of Coronavirus, such as the failure of the employer or other contractors on site to carry out work within the accepted programme, resulting in a compensation event under clause 60.1(5).  Coronavirus is highly likely to result in clause 60.1(19), concerning unforeseeable events, being invoked. To qualify, the event must be one which prevents the contractor completing by the completion date shown in the accepted programme, or completing the works at all, and:

1. is an event which neither party could prevent;
2. is an event which an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it; and
3. is not one of the compensation events specified elsewhere in the contract.

Clause 60.1 is supplemented by clause 61.3 which provides that if the contractor does not notify a compensation event within 8 weeks of becoming aware of the event, he is not entitled to a change in the prices, the completion date or a key date. Furthermore, clause 15.1, requires contractors to give an early warning notice if they become aware of “any matter” which could affect the total of the prices, could delay completion or a key date, or impair the performance of the works in use.

The requirements of clause 61.3 and 15.1 should not be taken lightly by contractors as the first reported case of the virus in the UK was in February 2020. As we approach the end of March 2020, the difficulty of claiming that an early warning notice was given increases with the more time that passes.

It will, of course, be easier for contractors to rely upon clause 60.1(19) if they were engaged under NEC contracts before the outbreak of the virus. As with JCT contracts, however, COVID-19 as a compensation event is yet to be tested by the courts. This suite of contracts is based on the principle of mutual trust and cooperation and the courts may look to see if a party’s conduct in response to the virus is consistent with those doctrines.

Given the extent of the Government measures so far in response to the virus, and the risk of the industry shutting down, factor (a) is unlikely to be a point of contention, but factor (b) may cause problems. If a contractor, who is still negotiating their contract during the Coronavirus pandemic, wishes to rely on clause 60.1(19) for money or an extension of time because of the impacts of Coronavirus in the future, he would need to argue that, at the time of signing the contract, the likelihood of Coronavirus having an impact on the works was so low that it was not necessary to allow for it. The courts are unlikely to entertain such an argument given the scale of the pandemic so far.

Termination

Under NEC Contracts, it is only employers that may terminate the contract under clause 91.7 R21 where a force majeure-type event occurs. Again the event must stop the Contractor completing the works, or stop the Contractor completing by the date in the accepted programme and be forecast to delay completion by at least 13 weeks, and it must also meet the criteria set out in points (a) and (b) above which applied to clause 60.1(19).

However, under clause 91.6, where the project manager orders work to cease and no instruction is given to re-start work within 13 weeks then, if the reason for the instruction was employer default (R19) or “any other reason” (R20), then the contractor may terminate the contract. We submit that if such an instruction is issued due to the effects of Coronavirus then that would be capable of being “any other reason”.  Any extension of the lockdown to construction sites is, we think, likely to be held by the courts to be of suspensory effect, so this would not necessarily amount to a situation where “…the Parties have been released under the law from further performance of the whole of the contract (R17)”, whereupon either party may terminate the contract under clause 91.5.

Contractual Remedies: Bespoke clauses

For contracts that have not yet been entered into, parties may wish to consider including bespoke clauses or amendments to existing clauses that specifically account for the impacts and effects of Coronavirus. It is not recommended that parties carry out their own amendments to their contracts; rather, parties should discuss their concerns with their lawyers who can then tailor the drafting to the contract and nature of work on-site. Whilst the courts will do what they can to give effect to what the parties objectively agree, the major risk for parties without expert help in drafting relief clauses too widely (or too narrowly) is that it could lead to unexpected relief (or denial of anticipated relief).

Conclusion

As the country enters into a period of uncertainty, the Government is likely to release further information concerning the future of the construction industry in the short term.

In the meantime, parties should take heed of the advice above and review the terms of their contracts with lawyers and consider drafting in provisions to cover events such as this occurring in the future.

Now is also an opportunity to check the terms of any insurance documentation and/or make enquiries as to whether the impacts to business operations as result of Coronavirus are covered.

If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Michelmores’ Construction & Engineering team.

CORONAVIRUS STOP PRESS – Click here to keep up-to-date with all of our latest articles.

This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.

Updated on 3 April 2020

Chaos wrought by the coronavirus has, in a matter of weeks, altered the social and commercial environment beyond recognition. Businesses are being forced to make existential decisions at short notice – without visibility on the duration or full extent of the disruption or the emergency assistance available – and with the country now in full lockdown. This short guide sets out certain steps and options for businesses seeking to weather the storm, based on information available at time of writing.

This article is aimed at solvent companies; where a company is insolvent, different considerations will apply. Our article on issues for directors trading through the coronavirus introduces some of those issues.

On 28 March, the Government confirmed that the wrongful trading regime for distressed and insolvent companies was to be temporarily relaxed (retrospectively from 1 March). While this will offer some comfort to directors faced with difficult decisions, directors’ duties and certain trading offences remain in place and we would recommend that directors continue to trade very cautiously during this period. This article, and our specific article on coronavirus and changes to the insolvency regime, reflect this position.

1          Review cashflow forecasts

In a lockdown scenario businesses must prioritise assessments of how far their cash in bank, without further revenue, will sustain them. Three weeks was the initial benchmark for the length of time that businesses would need to tread water, but this is in no way guaranteed. Forecasting should, at least in theory, look ahead to conditions once trading can resume, although the assumptions required to do so will be without precedent in modern history. Government assistance, discussed in greater detail below, will be a key mitigating factor and it is reasonable to assume that directors will be able to cite that support as a justification for reasoned operational decisions.

The wrongful trading regime (discussed in our article on directors’ duties and coronavirus), under which directors may attract personal liability for incurring liabilities where a company is or is likely to become insolvent, has been relaxed for three months from 1 March. However, directors still owe duties under the Companies Act 2006, including duties to act in the best interests of a company’s members (or its creditors where the company is insolvent), and Insolvency Act 1986 provisions, including fraudulent trading and transactions defrauding creditors, continue to apply. Further details are set out in our article on coronavirus and changes to the insolvency regime.

Regardless of the relaxation of the wrongful trading rules, directors should continue to trade very cautiously, and use such cashflow forecasting as is feasible to try to establish when a company is, or is likely to become, insolvent. Engaging financial advisors may assist with forecasting and contingency/post-lockdown recovery planning, as well as potentially providing directors with an additional layer of justification for decisions.

2          Cut costs

Employees the Government’s announcement on 21 March of its Coronavirus Job Retention Scheme, under which it will pay 80% of the wages of furloughed employees (capped at £2,500 per employee per month), was welcome news. In the context of total lockdown, taking advantage of this scheme will be essential. Our update on the Job Retention Scheme contains more detail.

How the scheme (currently set to run for three months) will work in the long term, and whether some businesses may still be forced to make redundancies or take other precipitous action, remains unclear. Under lockdown, even the 20% contribution by employers may prove unfeasible. Generally speaking, terminating an employee’s fixed term contract in response to coronavirus disruption will, if a full redundancy process is not followed, expose the employer to a claim for unfair dismissal. A proper redundancy procedure entails expense and takes time, and may not therefore be feasible where the end-point of the disruption remains unknown. If all else fails, mothballing the business, discussed below, may be an alternative.

Freezing or minimising orders from suppliers should be undertaken as appropriate. Dialogue with suppliers should be maintained and plans put in place for resumption at the end of the lockdown period.

Defer capital expenditure and investment. Spending on longer-term projects or improvements that will not generate cash in the short term will, generally, be inappropriate during lockdown and the period immediately following it. Recruitment, marketing, premises moves and technology overhauls may need to be postponed.

Suspending payments to creditors, including landlords and suppliers may, if those creditors are not essential suppliers or likely to take enforcement action, provide breathing room. Non-payment should be considered very carefully as, depending on a company’s circumstances, directors may be required to have regard to the interests of that company’s creditors. Non-payment may also constitute an event of default under the company’s banking documents. The Government has declared a three-month moratorium on commercial leasehold forfeiture (in respect of non-payment of rent only, so that service charge and other agreed leasehold costs remain payable), although this is a stopgap measure which does not authorise non-payment of rent nor rectify breaches of banking covenants.

Mothball the business. A draconian step, but one which may offer longer-term certainty. A company may enter a solvent liquidation, in which an insolvency practitioner takes control of the company, settles its liabilities from its available assets and returns the surplus to its shareholders. Solvent liquidation can, depending on the circumstances, allow business owners to extract surplus cash from a business, retain its intellectual property (including branding) and warehouse it until the period of turbulence ends, following which they re-animate it as a new company. How this affects the business commercially is a tricky call. It should be emphasised that a company that is insolvent cannot use this process, and specialist insolvency advice should be obtained in those circumstances.

3          Explore funding options

Government relief may be available. 12 months of rate relief, as well as grant funding, have been confirmed for retail, hospitality and leisure businesses, and Time to Pay arrangements with HMRC are reportedly being agreed summarily, subject to monitoring requirements. The Coronavirus Job Retention Scheme is discussed above.

The Coronavirus Business Interruption Loan Scheme, which is available from week commencing 23 March to small and medium-sized enterprises (SMEs), commits the Government to guaranteeing 80% of a loan (up to a maximum loan amount of £5m) to a qualifying business, subject to certain restrictions. The Government will meet interest payments on the loan for the first 12 months. Companies with annual turnover above £45m will be ineligible. In an announcement on 2 April, the Government confirmed that participating lenders cannot first recommend non-CBILS loans to applicant companies, nor demand security or personal guarantees for CBILS loans of under £250,000.

The Covid Corporate Financing Facility for large businesses is also available as of 23 March. The scheme will run for an initial period of 12 months and involve the Government purchasing newly-issued commercial paper issued to  ‘firms that can demonstrate that they were in sound financial health prior to the impact of Coronavirus‘ and that ‘make a material contribution to the UK economy‘. The minimum issue size is £1m. There are concerns that a large number of businesses fall between the cracks in the criteria for this scheme and those for the Coronavirus Business Interruption Loan Scheme – failing to meeting the ‘material contribution’ aspect of the former and the turnover limit of the latter.

Drawing down on existing facilities, obtaining new credit or negotiating forbearance with lenders can provide breathing room while other mitigation is undertaken. Dialogue with lenders should be maintained throughout.

Insurance policies should be reviewed to establish whether pandemics (and, following the commencement of lockdown, mandatory closure of business venues) are covered. Cover is, generally, unlikely to be available, as business interruption provisions usually require quantifiable physical damage to property as the basis of a claim. Policies may, however, contain relevant extensions or specific disease-related wording. Our article on insurance cover in the context of coronavirus contains a more detailed account.

The Financial Conduct Authority (FCA) has written to listed companies requesting that they observe a moratorium on publication of their preliminary financial statements until Sunday 5 April. The moratorium, which is voluntary, applies only to full-list PLCs and does not relate to trading updates issued by RNS. In the meantime, PLCs should be able to provide sufficient information to the market in the form of RNS updates without publication of financial statements; where a PLC has concerns about the impact of delaying publication, it is understood that the FCA has, to date, been responsive in fielding questions. Private companies may apply online to Companies House for a three-month extension to the deadline for filing accounts.

4          Diversification

Certain industries, including food, media, healthcare commodities and delivery services are trading well, at least in the short term, in the coronavirus chaos. While some businesses are more adaptable to an environment of mass reclusion than others, there may be opportunities to adjust business models in novel ways to fit the altered market, helping companies to ride out the crisis.

Migrating online. As society has retreated indoors and communicates almost solely through the internet, businesses formerly reliant on physical presence should consider whether their offering can be adapted to a primarily virtual format. Multi-platforming, or coordinating bricks and mortar supply with online trade, has been a high street imperative for some time, and that process seems now to have been, at least temporarily, brought forward by several generations. Entering online marketplaces and using new or existing infrastructure to fulfil contracts may allow some businesses to continue in an altered form.

Alternative delivery methods for existing services may become available; the relaxation of planning laws for pubs, allowing them to serve meals and non-alcoholic drinks as takeaways, may add a new dimension to the prepared food market at a time in which the food supply landscape has changed dramatically. Other relaxations of laws and regulations, or changes in consumer habits, may arise in due course.

Repurposing production to in-demand goods can turn a crisis into an opportunity. Brew Dog and Louis Vuitton parent company LMVH have moved in to hand sanitiser production, and private manufacturers are dedicating factory resources to medical ventilator production. Businesses with transferable plant, access to raw materials and versatile staff may be able to temporarily metamorphose in this way.

If you require legal advice on coronavirus disruption planning, please contact a member of our specialist teams.

For corporate and commercial advice, please contact David Thompson or Richard Cobb.

For employment advice, please contact James Baker.

For insolvency advice, please contact Sacha Pickering or Karen Williams.

If you would like to download a PDF version of this article please click here.

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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.

Commercial property insurance policies typically require business premises to be occupied for the coverage to be effective, or for policyholders to notify the insurer if the property is going to be unoccupied for a period of time. Many policies also contain warranties pertaining to the security of the premises insured, for example the presence of security staff.

Following the recent, Government-mandated closure of certain businesses, and the continued Government guidance that all workers should, if possible, work from home, a significant number of food & drink, retail, leisure and other commercial premises, as well as office buildings, will now be unoccupied.

The Association of British Insurers (ABI) has provided guidance to policyholders in relation to unoccupied premises stating that:

• “If a business has to temporarily close because of Covid-19, where customers are taking the appropriate steps to mitigate the risk of damage to the property whilst unoccupied, insurers will be flexible around the period of un-occupancy specified on the policy document.
• Policies will often include conditions that are intended to ensure good practice in protecting buildings of damage caused by the risk of fire, theft and escape of water, which are often increased when a building is empty.  It is important that business owners continue to follow risk management advice and ensure they understand what steps they need to take.
• Some insurers have also waived requirements for their business customers to immediately notify them of their unoccupied status, (depending on the individual business circumstances).  This should help those customers concentrate on managing their businesses and allow insurers’ call centres to focus on managing the significant number of insurance claims being processed.
• If there are any specific requirements as part of your insurance contract that you are unable or unlikely to be able to comply with, such as on-site security, speak to your insurer or insurance advisor/broker.”

Whilst the guidance provided is helpful, it appears that the approach being adopted varies between different insurers with some stating that they will not enforce provisions relating to unoccupied premises at all, and others merely agreeing to relax/extend the provisions. For example, Zurich has said that “where buildings are temporarily closed due to the COVID-19 outbreak, our Unoccupied Conditions will not apply and we will not be taking any further measures to restrict coverage.” By contrast, Allianz has provided the following advice for commercial landlords:

“We usually ask that you notify us if the premises are going to be unoccupied for more than 30 consecutive days for Allianz Commercial standard policy wordings, or 45 days for SME wordings.  We’re now extending this period to 60 days, so you only need to let us know at the end of the 60 day period if the premises will still be unoccupied. During that 60 day period your customer’s existing cover will remain in place.”

What should you do?:

1. Check your policy to see what conditions apply.
2. Contact your broker/insurer to understand their position on the enforcement/applicability of unoccupied premises conditions during the current period.
3. Ensure that insofar as possible you are complying with any warranties/conditions pertaining to risks which are increased where buildings are unoccupied (e.g. fire, theft, flood). Zurich, for example, has stated that where its customers are “making appropriate provisions to mitigate their unoccupied risk as a result of Coronavirus, the temporary closure of your building should not prejudice any claim made” thereby leaving the door open for the insurer to argue that adequate mitigation measures were not taken by the policyholder to prevent a claim.
4. Where you cannot comply with certain provisions, such as the requirement for security staff, seek specific confirmation from your insurer that this will not prejudice your cover.
5. Continue to keep the situation under review as Government guidance changes; insurers may take a different approach to businesses who are required to be closed (e.g. restaurants) compared to businesses who have chosen to close due to the Government guidance (e.g. offices).

If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Insurance team.

CORONAVIRUS STOP PRESS – Click here to keep up-to-date with all of our latest articles.

This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.