23 Mar 2018

COT's top four commercial issues - March 2018

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The snow has retreated, Spring is in the air. What better way to start your weekend than reading this month's edition of our commercial review.

Fintech - New crowdfunding regulations

Fintech remains a hot topic for 2018, and the European Commission (Commission) has identified that (a) many nascent businesses struggle to find investment when going through the early stages of growth; and (b) small-scale investors can find it difficult to find appropriate investment opportunities. With this in mind, the Commission has set out its proposal for the regulation of crowdfunding service providers in the EU. Crowdfunding is a method of raising funding for a project or venture by asking large numbers of people to contribute towards the project, and has become a popular alternative to more traditional fundraising practices.

Crowdfunding typically takes place via online platforms, and is currently regulated by national legislation, with the variances between these different laws making it difficult for crowdfunding platforms to operate and provide services across borders. As such, the Commission has determined that rules with EU-wide application will make it easier for crowdfunding platforms to operate across member states, thereby introducing more investors to a wider range of potential investment opportunities. The Commission has stated that the proposed regulation will protect investors by virtue of the following protections:

  • crowdfunding websites will need to display disclaimers and warnings informing investors about the risks involved with crowdfunding;
  • potential investors will need to take a knowledge test to assess their understanding of financial products, and may also be offered the opportunity to assess their ability to bear financial losses;
  • crowdfunding service providers and project owners will be subject to a duty to disclose comprehensive information about each crowdfunding offer in a clear and transparent way to allow investors to assess the risks before investing;
  • crowdfunding service providers will need to obtain the best possible result for their clients when exercising discretion in how they carry out their clients’ orders, with a duty to avoid and prevent conflicts of interests; and
  • platform managers will be subject to reputational obligations.

Another facet of the proposed regulation is that all crowdfunding transactions will need to take place through entities that are authorised as Payment Service Providers under the Payment Service Directive (PSD2).

The proposed regulation will establish a “one-stop-shop” access to the EU market, setting out rules for European crowdfunding service providers and defining the requirements that crowdfunding service providers must meet to obtain authorisation from the European Securities and Markets Authority (ESMA). ESMA will be the regulatory body tasked with authorising, supervising and imposing penalties on crowdfunding service providers.

The scope of the proposed regulation will not extend to reward- and donation-based crowdfunding, nor will it extend to consumer lending since this covered by existing EU legislation.

Take notice of your notices clause

The courts have recently reaffirmed their position, in two separate cases, on the importance of complying with notice requirements. These cases look specifically at service of claim notices for breach of warranty and the content of notices.

Further, we are reminded of the importance of specificity of drafting and abiding by the terms if a notice is required. As cited by the oft-quoted Gloster J: "Every notification clause turns on its own individual wording", so make sure you know how yours are drafted!

The case of Zayo Group International Ltd v Ainger & Ors [2017] EWHC 2542 (Comm) centred on a share purchase agreement (SPA) dated 15 May 2014, pursuant to which Zayo purchased the entire issued share capital of a target company from a private equity fund and seven individuals who managed the target company.

Under the notices clause, Zayo was required to notify any claims within 18 months of completion of the SPA (by Sunday 15 November 2015), with the relevant notices served by 5pm on Friday 13 November.

Whilst Zayo succeeded in serving the notice of claim on six of the seven individual defendants before 5p.m. on the day of the deadline, the seventh defendant, Ms Jaggard, no longer lived at the address for service listed in the SPA. The courier, instead of leaving the notice at her old address, took it with him. By the time he returned to Ms Jaggard's ex-residence, it was 7.50 p.m. and the deadline for service had passed.

The court was unwilling to find an implied term in the SPA that Zayo only be required to "attempt to deliver" the notice. Accordingly, Zayo had failed to comply with the notices provision and Ms Jaggard had no liability to Zayo. Additionally, the notices provision provided that Zayo was required to serve notice on all individual defendants, so Zayo's failure in respect of Ms Jaggard meant that the liability of all the individuals lapsed.

The second recent case of Teoco UK Limited v Aircom Jersey 4 Limited, Aircom Global Operations Limited and anor [2018] EWCA Civ 23 relates to an SPA under which the sellers had given various warranties (including tax warranties and a tax covenant). Teoco's lawyers wrote to the sellers twice, highlighting the potential claim for unpaid tax and referred to the tax covenant and the warranties.

When Teoco later issued proceedings for breach of warranty and an indemnity to cover their tax liabilities, they argued that their previous letters constituted notice under the SPA. The sellers successfully brought an action to strike out the claims on the basis that Teoco had failed to provide reasonable details of the claim, including the grounds on which it was based and a good faith estimate of the amount of the claim, as required by the notices clause. The court considered that, in almost all circumstances, such a notice would need to set out the grounds of a claim by reference to specific warranties. LJ Newey noted that, in some cases, a reference to the wrong warranty may not invalidate a notice, but only to the extent that a reasonable recipient would not have been misled by the error. In this case, Teoco had neither cited the wrong warranty nor would it have been clear to the sellers, which warranty was in dispute. On this basis, the court unanimously held that the claims should be struck out.

Learning points

Often considered a mere "boilerplate", you should avoid using, or at least revisit, your template language and ensure that your notice clauses remain fit for purpose. For example, notice provisions often permit service by fax but many businesses have long since ceased to use fax, now relying primarily on e-mail. A party's failure to update an outdated notices provision will not protect them if the other side has served their notice in accordance with the contract, regardless of whether or not that notice is actually received.

Autonomous vehicles

After the tragic fatal collision between a pedestrian and an autonomous Uber vehicle in Arizona in mid-March, Uber has halted its testing of driverless cars in all locations and Toyota has suspended US testing on public roads. This awful event follows another fatal accident in 2016 when an autonomous vehicle failed to brake when another vehicle drove across the lane that it was in.

The question of who is at fault is now the topic of its own separate debate. It has been widely reported that neither the human driver nor the autonomous vehicle applied the brakes in the car. The Tempe Police Chief Sylvia Moir stated that it's clear it would have been difficult to avoid the collision in any kind of mode (autonomous or human-driven) based on how the pedestrian came from the shadows right into the roadway.

Despite the fact that the technology for driverless cars is still very much in a state of evolution, the UK Government is keen to ensure UK remains one of the best places in the world to develop, test and drive self-driving vehicles. At the beginning of March, the government commissioned a 3 year review by the Law Commission to analyse any potential legal and regulatory issues with the introduction of self-driving cars.

The Law Commission will be tasked with examining how the UK's traditional driving laws can support autonomous vehicles. Key aspects under review are:

  • redefining conventional definitions such as ‘driver’;
  • allocating civil and criminal responsibility where human controllers are present;
  • insurance models;
  • the role of automated vehicles within the public sector;
  • possible new criminal offences to deal with unlawful interference with autonomous vehicles; and
  • protection for other road users.

Is software delivered electronically "goods"?

This month, the Court of Appeal has reversed a High Court decision in holding that software delivered solely electronically is not goods and so is not subject to the Commercial Agency Regulations (Computer Associates UK Ltd v The Software Incubator Ltd [2018] EWCA Civ 518 (19 March 2018)). However, the court noted that software delivered by means of a backup disk or other tangible property may still be goods. Whether or not software is "goods" is significant because commercial agents are only protected by the Commercial Agency Regulations to the extent that they are negotiating the sale of goods.

There is some ambiguity over what "goods" are for the purposes of these Regulations and so which agents are protected, as this does not always turn on tangibility and there have been conflicting decisions on the point. For example, a previous decision held that software sold bundled within hardware counts as goods. It has also been held that agents selling gas and electricity, which are intangible, are protected by the Commercial Agency Regulations.

The software in question was delivered electronically (in a link by an email, which enabled a download) by an agent called The Software Incubator Ltd. The agent had agreed with the principal, Computer Associates UK Ltd, to devote "substantial time and effort" to performing its agency obligations to promote the software licensed by the principal. Six months later, the agent entered into a similar agency arrangement with a different company and the first principal terminated its agency agreement with the agent, claiming that the agent was in repudiatory breach of its "substantial time and effort" obligation. The agent then brought a claim for compensation under the Commercial Agency Regulations against the terminating principal, which was defended on the basis that the Commercial Agency Regulations did not apply to the situation since the agency did not relate to the sale of goods.

The Court of Appeal reviewed the authorities and held that computer software supplied electronically (and not on any tangible medium) does not amount to "goods" for the purposes of the Regulations. The agent was therefore not entitled to protection under the Commercial Agency Regulations and the principal's appeal was allowed on this point. Note however that the court still held that there was no lawful basis for the termination (the agency was non-exclusive) and so the appeal on this issue was dismissed.

This decision means that software's status (and so commercial agents' protection) turns on the medium by which it is delivered, which the court noted is rather an illogical result, and one that may require the law to be amended to keep pace with technological change. However, the court concluded that this issue was one for the legislature to resolve, not the courts.

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