20 Oct 2017

COT's top four commercial issues - October 2017

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Autumnal greetings from COT.

Now, while we appreciate that this snapshot comes to you slightly later than our usual monthly updates, this was, in fact, intentional.

It transpires that many of our readers also subscribe to our Data Protection team's monthly articles. As a result, we have taken the view to move the release date of our articles to the middle of the month, so as to allow our readers sufficient time to digest the pressing commercial issues before turning their attention to data protection matters.

With that in mind, please take a minute to prepare a warm beverage and enjoy…

Just who are these third parties anyway?

We've all seen it – a Contracts (Rights of Third Parties) Act 1999 clause shoved into a contract, without much thought as to who these third parties might be and whether the parties might actually want them to be able to enforce rights under the contract after all.

There is not a great deal of judicial reasoning on the 1999 Act, so a recent judgment from Mr Hancock QC sitting as a judge of the High Court in Chudley v Clydesdale Bank plc (t/a Yorkshire Bank) [2017] EWHC 2177 (Comm) may be of particular interest to commercial lawyers, as it considers third parties' attempts to enforce under the 1999 Act where they are not named in the contract.

The case was brought by four investors, who claimed damages from Yorkshire Bank in relation to a failed investment opportunity. The bank had received and acknowledged a letter of instruction ("LOI") from its investment company customer to open and operate a segregated client account for third party investors' monies, but had taken no steps to open such account. Third party investors then deposited funds in the (non-segregated) account operated by the bank and were defrauded of their funds by the investment company.

The investors argued that they were entitled to enforce the terms of the LOI between the bank and the investment company. Mr Hancock QC held that the LOI was not intended to be legally binding, so the claim failed. However, he held that if there had been a contract, the investors would have been entitled to enforce it as third parties under the 1999 Act, despite the fact that they were not named in the LOI as third parties entitled to enforce under the 1999 Act.

Under section 1(3) of the 1999 Act, in order to enforce the terms of a contract, a third party must be expressly identified in it by name, as a member of a class or as answering a particular description, but need not be in existence when the contract is entered into. The claimants argued that by virtue of the fact that the LOI referred to a "client" account, and they were the investment company's clients, they were therefore identified in the LOI as part of such class.

The court agreed that the fact that the LOI referred to a "client" account was sufficient to identify the claimants as persons intended to benefit from the contract. Mr Hancock QC held that a court may identify a class of claimants for the purposes of section 1(3) of the 1999 Act by virtue of a process of the construction of the express terms of the agreement. As long as the process of construction did not involve the court implying identification of the third parties, then such construction could be valid. The court also held that the same contractual term could satisfy both of the requirements in the 1999 Act, namely for (i) express identification of the third party; and (ii) the intention to confer a benefit under the 1999 Act.

Contracting parties should take note: third parties may have rights under the 1999 Act even where their class is briefly mentioned. As always, to avoid uncertainty, any drafting should make sure that only those third parties expressly referred to as having a benefit conferred on them by the contract will be able to benefit from it (and any third party rights should be specifically referenced, where possible). The alternative is for parties to exclude the 1999 Act altogether, where appropriate.

Modern Slavery - Update

Compliance with the Modern Slavery Act 2015 (MSA) continues to be a talking point, as the House of Lords will, in due course, prepare for the second reading of the Modern Slavery (Transparency in Supply Chains) Bill. As previously reported in our July issue, the MSA requires organisations, with a minimum turnover of £36 million a year (including subsidiaries' turnover), supplying goods or services to prepare and publish a slavery and human trafficking statement for each financial year.

A press release from the National Crime Agency in August this year revealed that modern slavery and human trafficking in the UK is more prevalent than previously thought, with over 300 live policing operations currently targeting modern slavery. Theresa May, in her address to the United Nations earlier this month, called for more to be done on an international level, whilst announcing a series of further measures to be implemented in the UK, including training new specialist investigators and developing prosecutors' expertise.

As organisations prepare to publish their second modern slavery and human trafficking statement since the MSA came into force, various governmental bodies and watchdogs have highlighted the lack of compliance with legislative requirements. Despite the increased media publicity surrounding modern slavery, the Chartered Institute of Procurement and Supply reported that one in three businesses have failed to comply with the MSA, whilst one in ten UK businesses have uncovered modern slavery in their supply chains.

Whilst penalties for non-compliance are currently limited (the Secretary of State can issue an injunction requiring compliance), the real penalty for any organisation failing to comply with the MSA will be reputational damage. Watchdogs continue to try and incentivise organisations to procure compliance with the MSA by naming and shaming those who fail to comply and the reasons for their failure, whilst publicly lauding those with notable practices.

Online safety

The Department for Digital, Culture, Media & Sport this month released a green paper setting out its internet safety strategy (Strategy), part of the Digital Charter, to crack down on issues such as cyber-bullying, trolling and under-age access to pornographic material. These issues are considered growing dangers and are receiving more and more attention from governments, charities and the media as problems that need to be urgently addressed.

The Government’s objectives are underpinned by the following key principles:

  • what is unacceptable offline should be unacceptable online;
  • all users should be empowered to manage online risks and stay safe; and
  • technology companies have a responsibility to their users.

By way of addressing these principles, the green paper proposes the following measures:

  • a new social media code of practice to see a joined-up approach to remove or address bullying, intimidating or humiliating online content;
  • an industry-wide levy so social media companies and communication service providers contribute to raise awareness;
  • an annual internet safety transparency report to show progress on addressing abusive and harmful content and conduct; and
  • support for tech and digital start-ups to think safety first, ensuring that necessary safety features are built into apps and products from the very start.

The green paper itself raises a number of questions about the practicalities of delivering the Strategy, for example, the extent to which any company offering a social media forum will be subject to the code of practice. What sort of entities will come under the scope of 'social media companies and communication service providers'? The green paper discusses the Government's plan to work in partnership with social media and other technology companies in delivering the Strategy, but will the social media code of practice only apply to dedicated social media websites and forums, or also to any small online community messaging boards and other websites and applications which allow members of the public to upload reviews or comments? The green paper suggests that the code of practice may be something that companies can opt-in to in order to demonstrate their commitment to improving online safety, but if this is the case, what sort of take up can be expected across the digital sector?

The consultation on the Strategy is due to close on 7 December 2017, with an aim of publishing the code of practice in 2018. It will be interesting to see how the consultation considers the practicalities of implementing the Strategy in a way that will have a meaningful effect on improving internet safety without stifling the growth of the ever-expanding digital sector, as well as how the Government will take into account the differences between internet giants such as Facebook and Google, who have the resources available to implement new technologies and monitor the use of their social media platforms, and smaller companies who are far more limited in what they are able achieve with their available resources.

Nothing compares

Last year the Competition and Markets Authority ("CMA") launched a study into whether the supply of digital comparison tools ("DCTs"), such as price comparison websites, may have adverse effects on consumers and competition. While the CMA has run previous studies in the past, which found that such DCTs offer consumers helpful and easy-to-use tools to allow them to search different suppliers and increase competition, the CMA had been made aware of concerns about the transparency of how the comparisons are achieved, consumer trust and how effective these DTCs are at increasing competition.

On 26 September 2017, the CMA published its final report having listened to the concerns and reviewed how the DCTs operated. The CMA largely found that users still had positive experiences using DCTs and that these tools generally appeared to increase competition, particularly in the telecoms and insurance markets. However, one of the most common concerns from users was relating to the DCTs’ transparency, accessibility and clarity about their use of personal information. This was an area where the CMA found that DCTs could do more to explain how they protected consumers and gave them control of their data.

Despite the general positive summaries, the most significant outcome from the report related to the CMA's concerns over how the various suppliers contract with the DCTs. Some of the contracts reviewed by the CMA contained clauses preventing suppliers from offering better prices on one DCT than on another ("Most Favoured Nation" clauses). Such clauses significantly undermine: (i) the competition between suppliers, which can distort the general market prices available to consumers; and (ii) competition between the various DCTs. As a result, the CMA has opened an investigation into the use of Most Favoured Nation clauses used by DTCs.

This investigation will be of great interest to lawyers who have drafted similar clauses to protect their business'/client's interests in competitive markets.


Handy hints - Liability caps and service credits

Many of us review and advise on service level agreements and service credit regimes and have to work carefully with the relevant stakeholders to ensure they are meaningful. While we will not delve back into June's edition regarding unenforceable penalty clauses, we have recently been discussing the relationship between liability caps and the amount of service credits one can claim.

Each service credit regime is likely to be bespoke and largely led by the commercial discussions. However, when the sums are not specifically set out but rather based on a percentage of the charges, thought should be given as to whether such credits would be counted towards the overall contractual liability cap. Without a statement to the contrary, it could be argued that any such credit would be subject to the cap. This could present issues whether you are in the position of supplier or customer in the transaction. A customer may not appreciate that, while receiving credits for an underperforming service, they are slowly eroding their liability pot should an actual claim materialise. Alternatively, a supplier could have agreed a higher cap on the assumption that (other than certain performance issues) a full claim is unlikely to arise, yet not appreciating that these service credits could reach a significantly higher amount than was anticipated.

Therefore, when setting and agreeing service credits, consider having a separate cap for the services credits or expressly stating that such credits will or will not count towards the liability cap.

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