20 Nov 2017

COT's top four commercial issues - November 2017

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Winter greetings to our avid readers.

We start this month's edition with the news that our Commercial Outsourcing and Technology team has grown with the hire of Stevie Vella. Stevie will be supporting our general commercial, technology and data protection teams, as well as producing insightful articles in our monthly snapshots.

Tropical tax

In light of the publication of the Paradise Papers, businesses would do well to remember the new offences introduced under the Criminal Finances Act 2017. It is now a UK criminal offence if a business fails to prevent its employees or any other person associated with it from facilitating tax evasion. One new offence applies to all businesses, wherever located, if they facilitate UK tax evasion; and the second new offence applies to UK-connected businesses if they facilitate non-UK tax evasion.

"Associated persons" are agents, employees and other persons who perform services for or on behalf of the business, such as contractors and suppliers. It will therefore be critical for businesses to maintain tight supervision over all of these associates. Since the new offences are strict liability offences, no intention on the part of the business needs to be shown in order to secure a conviction. Potential fines are unlimited and the reputational risks of a corporate criminal conviction are obvious. Convictions may need to be disclosed to regulators or when bidding for contracts (especially public sector contracts) and may therefore be likely to have an effect on an organisation's prospects of winning future business.

In a similar way to offences under the Bribery Act 2010, it will be a defence for a business to show that it had put in place reasonable procedures to prevent the facilitation of tax evasion taking place, or that it was not reasonable in the circumstances to expect there to be procedures in place. However, simply ensuring that "anti-tax evasion" or compliance with law clauses are included in contracts with suppliers and their sub-contractors will not be enough; businesses will also need to ensure that they put wider policies and procedures in place, such as due diligence checks on new suppliers, risk assessments and staff training.

In the current climate of adverse publicity regarding businesses' and individuals' tax affairs, it is arguably even more likely that prosecutions will be brought. Organisations should ensure that they have fully covered this issue if they don't want to risk becoming front page news.

Ambiguous liability

The English High Court, in Royal Devon and Exeter NHS Foundation Trust (RD) v ATOS IT Services UK Ltd (Atos) recently considered the meaning and effect of a limitation of liability clause in a contract.

By way of background, the test for contractual interpretation is what a reasonable person, having all background knowledge which would have been available to the parties, would understand the language in a contract to mean. English courts have historically taken a restrictive approach to interpreting limitation clauses, however recently the courts have been more willing to recognise commercial parties' appetite to apportion the risk of loss as they wish.

The facts of the case involved RD entering into a contract with Atos, pursuant to which Atos were to provide a computer system worth circa £5 million. There were allegedly defects in the system which resulted in RD terminating the contract and claiming £7.9 million in damages for wasted expenditure. RD argued that the limitation of liability provisions, linked to the total contract price, were unenforceable as they were ambiguous and uncertain.

It was held that, when interpreting limitation of liability clauses, there was no presumption against the parties having agreed to give up or limit their remedies for breach of contract. Provided that clear words had been used, the court would give effect to the commercial allocation of risk in the contract. The provisions in question were ambiguous and a number of conflicting interpretations were possible. The key question for the court was whether the clause could be made to make sense with sufficient certainty and clarity to be enforceable.

Where, as in this case, the words used could give rise to competing interpretations, one of which makes commercial sense and the other does not, it is open to the court to prefer the interpretation that makes commercial sense. Accordingly, it was held that the limitation of liability clause was capable of making sense with enough clarity for it to be valid and enforceable.

The secret agent

The importance of understanding the identities of the parties to an agreement was highlighted in the recent case of Sino Channel Asia Ltd v Dana Shipping and Trading PTE Singapore Court of Appeal (Civil Division).

The initial claim was brought by a ship-owner who entered into a contract with a charterer. Unbeknownst to the ship-owner, the charterer had engaged a third party ("Agent") to arrange the contract and to conclude the contract in the charterer's name. All of the communications in relation to the contract were between the Agent and the ship-owner, and so the ship-owner (mistakenly) thought that the Agent was employed by the charterer. When disputes arose, the ship-owner served a notice of arbitration on the Agent who took no steps to defend the claim and the charterer did not respond to the notice. The arbitrator therefore made an award in the ship-owner's favour.

The charterer was successful at the High Court ("HC") in having the arbitration award set aside. However, the ship-owner appealed to the Court of Appeal ("CoA") and the CoA allowed the appeal overturning the HC's decision. The main question for the HC and the CoA was whether the arbitration notice had been effectively served and to answer that question the Courts had to ask three further questions: (i) did the Agent have implied actual authority to receive service on behalf of the charterer; (ii) if not, did the Agent have ostensible authority to receive the notice on behalf of the charterer; and (iii) if not, did the charterer ratify the Agent's receipt of the notice?

Common law agency is predominantly focused on the different types of authority that an agent may have. The different types of authority fall primarily within four main categories: (a) actual authority (express or implied); (b) apparent or ostensible authority; (c) authority by ratification; and (d) authority arising by custom, although this case just concerns (a), (b) and (c). Actual express authority is usually given under a written agreement; however actual implied authority is inferred on an objective analysis of the parties conduct and the written agreement (if one exists).

After considering the different types of authority the Agent may have had, while the HC had answered "no" to questions (i), (ii), and (iii), the CoA answered "yes" to questions (i) and (ii) but agreed with the HC on (iii). In relation to implied actual authority the CoA found that the arrangements between the charterer and the Agent were unusual as although the charterer had assumed liability under the contract, it did not have any interest in, or impose any obligations on the Agent in relation to its negotiation or performance. It was illogical therefore to suggest that the charter had required notice to be served on it rather than on the Agent. Furthermore, in relation to ostensible authority the CoA found that the Agent enjoyed complete freedom to act as it wished which gave the impression that the Agent was to be dealt with for all purposes. However, the CoA's finding on question (i) alone was enough for the arbitration award to be reinstated.

This case acts as a reminder to parties to be specific in relation to the extent of an agent's authority, no matter how granular the point, in order to avoid undesirable outcomes. Although, more generally, before any party enters into an agreement it should ask probing questions to ascertain the relationship between the principals and the underlying contracting parties in order to sniff out the secret agents.

Full throttle for automated vehicles?

Hot on the heels of the government’s announcement of the first driverless lorry trials in the UK, the Automated and Electric Vehicles Bill (the Bill) has been introduced into the House of Commons, and is currently being debated in Parliament.

In his speech to the Association of British Insurers earlier this month, UK Transport Minister Chris Grayling set out his expectation that the first self-driving cars will reach the market and be used on UK roads as early as 2021. With the drive towards putting autonomous, low-emission vehicles on the road speeding up, and the government’s commitment to invest £100 million in the industry, the introduction of the Bill is well-timed.

As well as setting out a regulatory framework for public access to charging points for electric vehicles, the Bill also sets out the legislative groundwork for automated vehicle insurance, which has been developed with the support of the insurance industry. This is an important step in filling in the gaps presented by the existing insurance framework, where only a driver’s use of a vehicle is insured - an ever-present question mark hanging over any discussion about autonomous vehicles. With autonomous cars, the question of liability in a collision scenario is far wider than the traditional collision scenario: is the driver at fault, the vehicle manufacturer, or the developer of the underlying software technology?

The government has acknowledged that asking victims of road traffic accidents to take vehicle manufacturers to court would be time consuming and expensive, and have made efforts to ensure that victims will have quick and easy access to compensation with this new and updated insurance framework, and insurers will be able to recover costs from the liable party, which the government anticipates will be the manufacturer in the majority of cases. In summary, the Bill provides as follows:

  • An injured party (including the driver of an automated vehicle) will be able to claim compensation from the insurer of the automated vehicle when the vehicle is driving itself at the time of the accident.
  • Where an automated vehicle, which is driving itself, is not insured in accordance with an exception to section 143 of the Road Traffic Act 1988, the owner of the vehicle will be liable to the injured party.
  • The principle of contributory negligence will continue to apply where the accident or damage results from or is to some extent caused by the injured party.
  • The insurer or owner of an automated vehicle will not be liable to the automated vehicle user where the user was negligent in allowing the vehicle to drive itself when it was not appropriate to do so.
  • An insurer’s liability may be excluded or limited where the insured person has made or allowed software alterations to be made in violation of the insurance policy, or has failed to install a safety-critical software update.

The Bill also provides that an insurer has the right of recovery from any other person liable to the injured party, for example, vehicle manufacturer and software developers under common law principles and product liability laws. Whilst the Bill has made big steps in setting the insurance framework, some questions still remain, in particular, how the courts will determine whether a driver has displayed negligent behaviour in allowing a vehicle to drive itself.

The Public Bill Committee is scheduled to conclude this month, and there is hope that this Bill will have a smoother ride into becoming law than its abandoned predecessor, the Vehicle Technology and Aviation Bill.


Handy hints - Power of attorney

When a party, e.g. a customer, seeks to ensure it has sufficient intellectual property rights in any materials created by another party, e.g. a supplier, under an agreement, it would often include obligations on the supplier to transfer all intellectual property rights that exist in any such materials. To the extent that such rights cannot be automatically transferred or assigned, at times the customer will insist on the supplier holding such intellectual property on trust for the customer while also granting rights and powers to the customer to act on the supplier's behalf in order to enforce or benefit from its intellectual property rights. Depending on the drafting, this is likely to be granting a power of attorney. Although having such rights will help facilitate greater control over the relevant intellectual property, for the execution of a power of attorney to be valid, it is crucial to remember that it should be executed as a deed.

Many clients are unlikely to want the follow the formalities of executing the agreement as a deed and, as a result, you should consider including more detailed further assurance clauses setting out the steps that you would require to protect the intellectual property.

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