Product liability

PRODUCT LIABILITY

Product liability refers to the sector of law which holds suppliers, distributors, manufacturers and retailers responsible for the products they make available to consumers/the public. This means that if these products cause injury, the consumer can pursue a claim against one of the above in the supply chain (the specific one the consumer should pursue depends on the circumstances of the purchase).  Consequences of failing to supply satisfactory quality products could result in being fined or if serious enough, being imprisoned.

Who is Responsible for your Defective Product?

Producers

Producers can include importers, manufacturers, businesses that vary a product’s safety measures and that supply their own branded products. The producer of a product holds the main responsibility to make sure that products are safe for the public. There are various steps the producer has to comply with in order to ensure that they are fulfilling their responsibilities. These include warning consumers about possible risks, examining product safety and taking positive steps to resolve any safety problems which are discovered. Adopting a passive approach to the process for the maintenance of safety is not enough to fulfil your responsibilities.

If the producer’s product is deemed high-risk (this includes products such as medicines, fireworks, food and toys), the producer needs to take extra care in thwarting safety problems.

Please note that if you are a business who imports/exports products, there are further steps and considerations you need to take into account regarding product liability precautions.

Distributors

These are establishments like wholesalers and shops. They are not held liable for the injury/damage caused by defective and dangerous products, providing they hand over the identity and information of the producer who supplied them the products. Another condition is that they have not changed the product in any way (for example opened a sealed item).

How Can Product Liability be Avoided?

To avoid liability for defective/unsatisfactory products, suppliers should take out liability insurance.

What Happens if a Producer/Distributor is Found Liable?

If liability for a product which has caused harm lies with you, it is possible for the person who suffered the harm to sue you. This is true irrespective of whether they were the ones who purchased the product. The amount for which you can be sued depends on the injury suffered.

If you have product liability insurance then you will be protected from the damages awards and also from legal costs.

There are various bodies that can investigate and take action against producers/distributors if they believe that they are supplying defective/unsafe products. Enforcement authorities can take this type of action. Local councils also have officers who are responsible for Trading Standards and safety enforcement. If the product is defined as a special product, then there are separate bodies which deal with safety enforcement. Examples of special products are medicines and food.

What Can Trading Standards Officers Do if they find Unsafe Products

Should Trading Standards Officers discover unsafe products, they have the power to seize/buy goods in order to investigate the product. They also have the power to enter premises in order to check whether you are maintaining safety standards or if they believe that unsafe products are being distributed/supplied. If they believe they have found evidence to suggest the above, they are entitled to carry out the following procedures: order you to stop selling the products, ask the court for an order to destroy the products, prosecute you (which could result in either a fine or imprisonment) or recall the product which is unsafe.

How Can Product Safety Problems be Prevented?

As has already been mentioned, producers/distributors can prevent product safety problems by ensuring they think about safety at every stage of the production process, and also ensuring they stay up to date with safety standards and regulations applicable to their products.

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Partnership Act 1890

Partnership Act 1890

What is a Partnership

A partnership is a business organisation where partners (minimum of two) will usually share decision making and divide the profits and losses of the business between themselves. Any type of business can be formed as a partnership and the Partnership Act 1890 is the legislation which governs the rights and duties of the individuals who are in business together.

There are a few advantages for forming a business in the form of a partnership including the lack of formality, no publically available accounts, fewer rules and the fact that partners are treated as self employed for tax purposes.

The Relationship between a Partnership and the Partnership Act 1890

The formation of a partnership is relatively simple and does not require any formalities. According to the Partnership Act 1890 a partnership automatically comes into existence when persons are “carrying on a business in common with a view of profit”.

Partnerships are usually regulated by contractual agreements between the partners, although this is not compulsory. What the Partnership Act 1890 seeks to do is to compensate for the lack of a Partnership Agreement (known as a Partnership at Will) or fill in any gaps in a Partnership Agreement by implying certain terms. The Partnership Act 1890 is split up into the following sections:

  • The nature of the partnership
  • The relationship the partners to the persons they deal with
  • The relationship of the partners to one another
  • The dissolution or termination of the partnership

Ultimately, the purpose of the Partnership Act 1890 is to treat all partners fairly and equally because a partnership is a relationship which requires utmost good faith. This is a duty which applies throughout the life of the partnership until a partner’s retirement; although it is worth noting that a retired partner continues to be liable for any breaches of duty whilst they were a partner.

The Drawbacks of the Partnership Act 1890

The Partnership Act 1890 is a very old piece of legislation and does not offer solutions to all the modern day problems that a partnership may face. Some disadvantages of the Partnership Act 1890 are as follows:

  • A partner is not required to do anything towards the running of the business and therefore does not have to turn up to work.
  • All partners share profits equally no matter how much time or capital they put into the business.
  • A partner cannot retire or be expelled. If a partner dies or decided to leave, he can do so by giving notice to all the other partners. The partnership then has to be dissolved, the assets divided and a new partnership has to be created, a very impractical procedure.
  • All partners are jointly and severally liable for the liabilities incurred by the business. If a debt cannot be paid then a creditor can pursue all the partners individually.
  • Should a partner get into financial difficulty a creditor can take assets from the partnership to settle the debt.
  • All partners are considered agents of the business and therefore act on behalf of and bind all the partners.
  • All partners have an equal say in the running of the business.
  • It does not contain any provisions for preventing an outgoing partner from going to work for a competitor and poaching customers, clients or employees.

The partners themselves are free to exclude any of the terms of the Partnership Act 1890 in their Partnership Agreement, provided they all agree, although they continue to have a duty to act in the utmost good faith.

It is recommended that a full Partnership Agreement is drawn up to govern the relationship between the partners and avoid potential disputes by relying solely upon the Partnership Act 1890.

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Escrow Agreements

ESCROW AGREEMENTS

There are a number of different types of Escrow Agreements. In the UK one of the more common situations when an Escrow Agreement is used is for transactions involving the supply of software.

Clients often request Escrow Agreements when they are intending to enter into an agreement with a third party supplier for either a software licence or for  a bespoke product specifically designed for that client such as a website with underlying software. Issues can arise whereby the licence or website is provided to the client without access to the underlying source code, if this situation arises the client may be unable to update or amend their website or fully utilise the software licence.

Generally in an escrow agreement there will be a clause whereby the supplier will agree , if certain events take place, with the customer to deposit a copy of the source code and some parties also agree that updates of the software will be deposited at certain intervals, although this may involve additional cost.

The risk if an escrow agreement is not entered into is if the supplier becomes insolvent or is no longer able to either maintain the software or produce update.

Suppliers often will not wish to agree to enter into an Escrow Agreement but if they do not a customer could face the risk that the supplier does not complete the development of software which could have a financial impact on the customer.

Once the terms of the escrow agreement are agreed by the supplier and client an escrow agent needs to be appointed and will be a party to the agreement. An escrow agent is generally a neutral third party who specialises in providing a service such as this. A fee will need to be paid to the escrow agent for carrying out  its duties in respect of the escrow agreement.

It is important however to note that the source codes which are deposited should also include any relevant passwords etc. This is not a failsafe method for protecting the client as there is still a risk that whilst they may now have access to the source codes should the supplier not be in a position to continue their obligations under the agreement, they may not be able to find a third party who has the knowledge, skills or expertise to maintain the software or continue to develop it.

Escrow Agreements are much more widely used in the United States but in recent years companies in the United Kingdom have started to rely on these.

Because the escrow agreement is between the supplier, the client and the escrow agent it is a tri partite agreement and will need to be agreed and executed by all parties.

The escrow agreement is also often known as a source code deposit agreement.  He benefit of this agreement to both parties is that the client will only have access to the valuable source codes on the happening of certain events (so it is generally worst case scenario unless the client has purchased all of the rights connected with it) and it protects the supplier / developers position as the source code is protected and still kept confidential yet allows them to provide to the client the comfort they require that they will  still be able to access the source code should the supplier no longer be in a position to do so.

Your solicitor should be able to draft and negotiate the terms of the agreement on your behalf and will also have contacts with escrow agents.

An issue that often concerns the supplier / developer and must be dealt with within the agreement is the position under copyright law of the source code itself.

The document must stipulate exactly what will be deposited with the escrow agent and when this will take place. How many updates will be required will also be included. It must state specifically the circumstances which the parties agree under which the source codes can be released to the client. Further, it is important to provide for what the client can and cannot do with the material once it has been released to them. For example can they sell it on to a third party? The client will generally stipulate that the material deposited must be sufficient for them to have their software maintained or continued to be developed.

If you need advice on an escrow agreement or any aspect of intellectual property law, Debbie Serota, partner in our commercial law department can help and advise. Please get in touch.

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Alternative dispute resolution

Since the revised Civil Procedure Rules were introduced in 1998 there has been a concerted effort to encourage parties to undertake Alternative Dispute Resolution prior to proceeding to court. This can involve arbitration or mediation. Often agreements may specify that arbitration is obligatory. Mediation is a slightly more informal method, with the process to be determined by the parties. It is often the case that a list of mediators will be sent by one side to the other and then the appropriate person appointed from that list.

Under the Civil Procedures Rules 1998 there is an obligation to consider Alternative Dispute Resolution. That is, the parties must give a reasonable consideration and if it can be shown that they have unreasonably refused then there may be cost implications. That does not mean that the parties have to undertake Alternative Dispute Resolution or that they will be punished on costs, it merely means they have to give it proper consideration and not unreasonably refuse. The same applies to Employment Tribunal proceedings, although it is less likely that there will be any cost consequences.

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The importance of deadlock and drag and tag clauses in shareholder agreements

Shareholder agreements – deadlock

You have formed a company and you have carefully considered the worst case scenario of what to do in the event of deadlock. Hopefully your draft shareholders agreement is taking shape. What to do if one party wants to sell and the other(s) do not ? Is that shareholder free to sell if he or she likes regardless of the wishes of the others? Can you be forced into a sale? These eventualities are known generically as drag and tag

Drag and tag are two important provisions often found in agreements between shareholders of a company.

Drag along

“Drag” rights favour the majority shareholder.  They enable the majority shareholder to compel the other shareholder(s) to sell their shares if the majority shareholder has agreed terms for the sale of the company to a buyer.

As the name suggests it allows the majority shareholder to drag the other shareholders along. Buyers rarely agree to permit a minority shareholder to retain a minority share. The minority cannot be compelled to sell unless, not only the price but also the terms upon which the majority shareholder has negotiated the sale, such as payment by instalments or a performance based additional price, must be extended to the minority shareholder otherwise he cannot be compelled to sell.

Drag along protects the majority shareholder from being “locked in” whilst at the same time ensuring that the minority shareholder is treated identically with the majority shareholder. This needs a great deal of thought as you discuss your shareholders agreement with your fellow shareholders. Are you willing to be forced to sell? Can you rely on the judgment of the majority shareholder?  What if he chooses to sell to another company in which he has an interest? Should that be covered in your agreement? You would be well advised to seek the guidance of a specialist company lawyer but at least this article will help you to spot the Drag Along provisions in your draft agreement

Tag along

Not surprisingly the tag clause is designed to protect the minority shareholder from being left behind when a majority, or substantial, shareholder decides to sell. It enables the other shareholder(s) to force the selling shareholder to make it a condition of sale that the buyer must offer to buy the shares of the other shareholder(s) at the same price and on the same terms at the same time.

Protection

Drag and Tag both protect the value of the shares in a company by avoiding the shares being locked in. A 10% stake is difficult to sell and, therefore vulnerable to a buyer forcing a sale at a price which may have little relationship to the value of the company as a whole. It may, therefore be very important in terms of your investment in the company to ensure that your shares can form part of a larger number of shares thus keeping the price up. On the other hand without Tag rights you may find yourself stuck with an unsalable or devalued shareholding. Tag rights provide protection for the shareholders’ share value from being adversely affected due to them not being able to sell them.

Here is a true life example of how drag-along rights can affect shareholders’ interests, A was able to force an unfavorable sale of B Limited to an associated company C Limited, i.e. in effect a sale to itself, leaving the other shareholders behind with a nothing.

One minute the shareholders of B Limited had a profitable business with valuable assets. The next they had no shares and no company. It was open to the shareholders to challenge this abuse of Drag along rights and I will deal with how this might work in a further article. However more careful drafting and better advice would have produced a shareholders’ agreement which would have prevented A from selling, and forcing the other shareholders to sell at a price which was not at arm’s length or at market value. Be aware. It could happen to you!

These rights, properly drafted, of course, are particularly necessary where the intention of the shareholders is to sell at some time in the foreseeable future. They can avoid the ransom threat of a shareholder holding out and killing off the prospect of a valuable exit. So Drag along and Tag Along are important elements of the shareholders’ agreement. Use them well

This is an example of how they can be used in less ethical ways than is the intention of the shareholders when they agree them – all the more reason to be careful who you go into business with and who you instruct to represent you.

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Sole proprietor

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Franchise Agreement

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Franchises

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Starting your own business

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Starting a business

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