• At Kemp Little, we are known for our ability to serve the very particular needs of a large but diverse technology client base. Our hands-on industry know-how makes us a good fit with many of the world's biggest technology and digital media businesses, yet means we are equally relevant to companies with a technology bias, in sectors such as professional services, financial services, retail, travel and healthcare.
  • Kemp Little specialises in the technology and digital media sectors and provides a range of legal services that are crucial to fast-moving, innovative businesses.Our blend of sector awareness, technical excellence and responsiveness, means we are regularly ranked as a leading firm by directories such as Legal 500, Chambers and PLC Which Lawyer. Our practice areas cover a wide range of legal issues and advice.
  • Our Commercial Technology team has established itself as one of the strongest in the UK. We are ranked in Legal 500, Chambers & Partners and PLC Which Lawyer, with four of our partners recommended.
  • Our team provides practical and commercial advice founded on years of experience and technical know-how to technology and digital media companies that need to be alert to the rules and regulations of competition law.
  • Our Corporate Practice has a reputation for delivering sound legal advice, backed up with extensive industry experience and credentials, to get the best results from technology and digital media transactions.
  • In the fast-changing world of employment law our clients need practical, commercial and cost-effective advice. They get this from our team of employment law professionals.
  • Our team of leading IP advisors deliver cost-effective, strategic and commercial advice to ensure that your IP assets are protected and leveraged to add real value to your business.
  • Our litigation practice advises on all aspects of dispute resolution, with a particular focus on ownership, exploitation and infringement of intellectual property rights and commercial disputes in the technology sector.
  • We have an industry-leading reputation for our outsourcing expertise. Our professionals deliver credible legal advice to providers and acquirers of IT and business process outsourcing (BPO) services.
  • We work alongside companies, many with disruptive technologies, that seek funding, as well as with the venture capital firms, institutional investors and corporate ventures that want to invest in exciting business opportunities.
  • Our regulatory specialists work alongside Kemp Little’s corporate and commercial professionals to help meet their compliance obligations.
  • With a service that is commercial and responsive to our clients’ needs, you will find our tax advice easy to understand, cost-effective and geared towards maximising your tax benefits.
  • At Kemp Little, we advise clients in diverse sectors where technology is fundamental to the ongoing success of their businesses.They include companies that provide technology as a service and businesses where the use of technology is key to their business model, enabling them to bring their product or service to market.
  • We bring our commercial understanding of digital business models, our legal expertise and our reputation for delivering high quality, cost-effective services to this dynamic sector.
  • Acting for market leaders and market changers within the media industry, we combine in-depth knowledge of the structural technology that underpins content delivery and the impact of digitisation on the rights of producers and consumers.
  • We understand the risks facing this sector and work with our clients to conquer those challenges. Testimony to our success is the continued growth in our team of professionals and the clients we serve.
  • We advise at the forefront of the technological intersection between life sciences and healthcare. We advise leading technology and data analytics providers, healthcare institutions as well as manufacturers of medical devices, pharmaceuticals and biotechnological products.
  • For clients operating in the online sector, our teams are structured to meet their commercial, financing, M&A, competition and regulatory, employment and intellectual property legal needs.
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  • The mobile and telecoms sector is fast changing and hugely dependent on technology advances. We help mobile and wireless and fixed telecoms clients to tackle the legal challenges that this evolving sector presents.
  • Whether ERP, Linux or Windows; software or infrastructure as a service in the cloud, in a virtualised environment, or as a mobile or service-oriented architecture, we have the experience to resolve legal issues across the spectrum of commercial computer platforms.
  • Our clients trust us to apply our solutions and know-how to help them make the best use of technology in structuring deals, mitigating key risks to their businesses and in achieving their commercial objectives.
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  • Our legal professionals work alongside social media providers and users in relation to the commercial, privacy, data, advertising, intellectual property, employment and corporate issues that arise in this dynamic sector.
  • Our years of working alongside diverse software clients have given us an in-depth understanding of the dynamics of the software marketplace, market practice and alternative negotiating strategies.
  • Working with direct providers of travel services, including aggregators, facilitators and suppliers of transport and technology, our team has developed a unique specialist knowledge of the sector
  • Your life as an entrepreneur is full of daily challenges as you seek to grow your business. One of the key strengths of our firm is that we understand these challenges.
  • Kemp Little is trusted by some of the world’s leading luxury brands and some of the most innovative e-commerce retailers changing the face of the industry.
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  • FlightDeck is our portal designed especially with start-up and emerging technology businesses in mind to help you get your business up and running in the right way. We provide a free pack of all the things no-one tells you and things they don’t give away to get you started.

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SAP v Diageo: Slicing the salami

In the recent case of SAP UK Ltd v Diageo Great Britain Ltd [2017] EWHC 189 (TCC), SAP succeeded in its claim against Diageo for over £54.5 million of additional licence and maintenance fees arising from indirect use of licensed SAP software that was out of the scope of Diageo’s software licence and maintenance support agreement with SAP (“Agreement”).   

Background

In May 2004 SAP, a world leader in business applications, originally entered into the Agreement and granted a licence to Diageo plc, a global alcoholic beverages company, to use SAP’s mySAP Business Suite software and certain software engines and SAP agreed to provide maintenance support to such use. SAP alleged that Diageo’s use of the mySAP Enterprise Resource Planning software (“mySAP ERP”) and SAP Exchange Infrastructure software engine (“SAP PI”) infringed Diageo’s licence with SAP, in particular in relation to SAP PI which was software that facilitated interactions between third party software and the SAP software.

In around 2011, Diageo used a hosted software platform made available by Salesforce.com (a competitor of SAP) to develop two new software systems: Gen2 and Connect (the “Diageo Systems”). The former assisted with the management and tracking of sales by collation of data whilst the latter facilitated direct review and placement of orders via an online portal. The Diageo Systems were then launched into live use by Diageo in 2012 and interacted with mySAP ERP via SAP PI. SAP claimed that it had a right to £54,503,578 either in additional fees or damages because the Diageo Systems used and/or accessed the mySAP ERP software directly or indirectly. On the other hand, Diageo was of the view that the existing licence fees that they paid for using the mySAP Business Suite software and software engines covered the use of SAP software with the Diageo Systems.

Judgment

The High Court examined how the Diageo Systems functioned in light of the terms of the Agreement, specifically focusing on the wording of the recitals and the licence provisions in relation to authorised usage. In reaching its judgement, the Court only considered the issue of liability, leaving the issue of quantum to a later date.

The Agreement used a tiered pricing structure, such that fees were payable based on the number of “Named Users” of mySAP ERP, who were in turn defined as “individual[s]… authorised to use or access the software directly or indirectly”. The licence stated that whether a Named User was in fact authorised, depended upon their user category as set out in specified list in a schedule to the Agreement. Applying Arnold v Britton [2015] UKSC 36, the judge, Mrs Justice O’Farrell, rejected Diageo’s claim that the Agreement was a “gatekeeper licence” for general access to the SAP software suite, and found that there were no words in the Agreement to make an exception to the rule that usage under the Agreement was subject to this Named User pricing structure.

Further, upon examination of how the Diageo Systems interacted with mySAP ERP, the judge found that, logging on to the Salesforce interface used by the Diageo Systems triggered messages and data to be sent to and from mySAP ERP via SAP PI.  This in turn meant that customers accessed mySAP ERP indirectly through SAP PI and the Diageo Systems in breach of the licence conditions of the Agreement.

Analysis

It is standard practice for licensors, whether software vendors, market data vendors, content distributors or any other copyright owner, to seek to permit only a defined list of activities in respect of their intellectual property and to exclude any other activity. This encourages the customer to speak to the licensor for any new usage, allowing the licensor to extract new fees and keep on top of development in the market.

However, in this instance Diageo will feel aggrieved that O’Farrell J did not find in its favour. The Diageo Systems were designed to remove the need for call centre staff to regularly access to mySAP ERP when dealing with customer queries, and instead allow Diageo’s customers to engage with mySAP ERP via the Salesforce.com cloud platform. When the parties entered into the Agreement in 2004, this way of interacting with mySAP ERP and SAP PI was not anticipated and, consequently, not reflected in the Agreement.

Diageo took the view that since it had paid SAP for access to the mySAP ERP software and a separate fee for the SAP PI software to facilitate access by third party platforms, access by the Diageo Systems to the SAP software packages was therefore permitted. As such access by a third party cloud platform was not covered by the pricing structure (as the judge also found), Diageo thought that no charge was payable.

It is possible to have sympathy with Diageo’s position, as the Agreement appears to have lacked any catch all provision that may have clearly prohibited any usage other than as specifically licensed. Organisations will often have one vendor’s software interfacing with the software of another vendor, and so managing the different licence fee structures in respect of such interfaces and otherwise can become a complicated task. However, what seems to have undone Diageo in this case is that the interface with the Diageo Systems was intended to channel requests from multiple individuals and this reflected the “per user” method of charging by SAP, which may have encouraged the judge to look beyond the Diageo Systems connecting with the SAP software and to examine the activities of the ultimate users – which in this case was a much larger group of individuals.

Conclusions

Licensors will want to ensure that:

  • clear wording is included in their licence agreements;
  • the licence excludes all usage except as specifically authorised; and
  • fee structures are plainly stated to ensure that the licensor can recover charges for increased usage or require additional fees for a change in the nature of such usage.

Customers ultimately need to ensure that:

  • their use of software complies with the terms of the agreed licence; and
  • such use is also aligned with the agreed charging mechanisms in respect of software provided.

This case is a good reminder to customers to be watchful of any usage that may deviate from what is originally agreed. If the customer proceeds with incremental usage without the licensor’s agreement, it runs the risk of a large back bill at a later date. Sooner or later, the licensor is likely to get wind of the customer’s usage, whether in the marketplace, on renegotiation, an audit, disposal of a business or when new or additional services are requested.

That being said, when entering into new licence agreements, customers should pay particular attention to the scope of use and continue to manage such contracts diligently on an ongoing basis to prevent unwanted surprises in the form of additional fees. Early and open communication with licensors can help customers manage their exposure, as it is more difficult for licensors to levy charges for small incremental changes in scope and discussion with the vendor can take the additional costs into account when re-designing their systems.

Two plead guilty to gambling offences in first case related to unlicensed online gambling using in-game virtual currency

On 6 February 2017 business partners Craig Douglas and Dylan Rigby pleaded guilty to offences under the Gambling Act 2005 in what is thought to be the first prosecution brought by a gambling regulator related to use of in-game virtual items such as “skins”[1].  Mr Rigby was ordered to pay £174,000, and Mr Douglas £91,000, in fines and costs for providing facilities for gambling without the required licence and advertising unlawful gambling.

There has been a lot of interest in the gaming industry recently surrounding the use of in-game virtual items to gamble. Under the Gambling Act 2005 it is a criminal offence to offer British consumers facilities for lotteries, betting or games of chance without a gambling licence (unless an exemption applies) – and anyone advertising unlawful gambling also commits a criminal offence. To qualify as gambling under the Gambling Act there is no need for “real” money to be staked or won – it is sufficient if the bet (or payment to participate in a lottery) or the prize is “money’s worth”. When assessing whether gambling using in-game virtual items requires a licence, the focus in Great Britain has therefore been on whether these virtual items are “money’s worth”. In a discussion paper[2] published in August 2016 the Gambling Commission said it was paying close attention to the growing popularity of in-game items which could be won or purchased within computer games and then used as a form of virtual currency on gambling websites and set out its view that a gambling operating licence is required to offer facilities for gambling with virtual items which are traded or tradeable and can therefore act as a virtual currency. The topic was also debated at the Gambling Commission’s “Raising Standards” conference in November 2016when the Commission noted that skins seemed to be moving from a niche sub-culture to the mainstream.

In this case Craig Douglas, 34, of Colchester, Essex and Dylan Rigby, 33, of Ilford, Essex ran a social gaming website at FUTGalaxy.com which allowed users to gamble, including by betting on real-life football matches and playing a jackpot lottery style game, using a virtual currency called “FUT coins”. These coins could be earnt by playing the Fifa football video game in Ultimate Team mode, or bought on FUTGalaxy.com or other third party websites for cash. FUTGalaxy.com had no connection with the Fifa game and the buying and selling of Fifa coins is expressly prohibited by the Fifa game rules. However FUT coins could be readily converted back into cash on third party black market websites and they were therefore considered to be “money’s worth” for the purposes of the Gambling Act, with the result that a gambling licence was required for gambling using these coins. 

The Commission made clear in its August discussion paper that taking action against anyone offering facilities for gambling to children and young people was a particularly high priority. FUTGalaxy.com did not have an age restriction and in the judge’s view the defendants knew that children used the site, or at least turned a blind eye to this. According to the Guardian[3] the court was shown a video from Douglas’s YouTube channel (which had a following of well over one million) in which he promoted FUTGalaxy by saying “you don’t have to be 18 for this, because this is a virtual currency”. In its press release[4], the Commission said that “given the nature of the products offered by FutGalaxy.com the Commission was particularly concerned about its popularity amongst, and use by, children and young persons” and the judge similarly made it clear that the fact that the children were gambling on FUTGalaxy.com website was an aggravating factor.

The prosecution was being seen as a test case for the treatment of in-game items in this area. While the defendants’ last minute change to guilty pleas means the position with regard the use of virtual items to gamble is still to be tested in the courts, the case does demonstrate the Commission’s willingness to take action against those who use tradeable virtual items as a de facto virtual currency, particularly where children are involved.

Regulatory references: are you ready for 7 March 2017?

Financial services firms still have a few weeks to get ready for the new regulatory reference regime that comes into force on 7 March 2017. These rules have been introduced as part of the SMCR/SIMR accountability regimes and place obligations on all financial services firms, not just those currently caught by SMCR and SIMR. At our recent client roundtable event, just over half of those surveyed said that they were starting to review their internal policies but for others, there is still work to be done!

What are the new rules?

The reference rules replace the transitional arrangements which have been in place since March 2016 and will require all FCA regulated firms recruiting for certain roles, including SMFs, SIMFs, FCA-controlled functions, SHF, PRA-controlled functions, KFH and Notified NEDs to request regulatory references going back over the last six years of the applicant’s employment. Firms in receipt of such a request are required to provide a reference, covering the last six years and beyond in the event that the individual had committed serious misconduct at any point during their employment. References should be provided as soon as reasonably practicable and within 6 weeks of the request. Banks and insurance firms are required to respond to reference requests by using the FCA/PRA mandatory template but must also include all “relevant information” regarding the individual’s fit and proper status. Relevant information includes such information as the regulator would typically take into account, such as matters relating to conduct; honesty, integrity and reputation; competence and capability; and financial soundness. Other FS firms are not obliged to use the template when responding, but must still give all relevant information.

The new rules also contain an obligation to provide an updated reference where information comes to light after a reference has been given, where such information would have changed the contents of the original reference had it been known to the reference giver at the time it gave the original reference. The obligation extends to updating the current employer only and the firm updating the reference is required to take reasonable efforts to find out whether the firm(s) to which it has provided references in the past still employ the individual.

What must firms do now?

Under the new rules, firms are required to have appropriate policies and systems in place to enable them to meet their obligations, and for those firms in the SMCR and SIMR regimes, responsibility for the reference process will lie with a SMF or SIMF. This means that firms should now be:

  • Designing a reference policy and identifying the areas of the business responsible for managing and following it
  • Ensuring that data regarding performance and conduct is kept so as to allow references to be provided
  • Devising a system to allow for updating of references including a right of reply to the individual affected by the updated reference
  • Considering the impact of the new rules on existing systems and policies, such as recruitment, disciplinary procedures and remuneration/reward processes
  • Reviewing settlement agreements to ensure that the firm’s regulatory reference obligations are not fettered or limited
  • Training managers to ensure the new rules are taken into account on employee hires and exits

For advice on how best to meet your obligations under the new reference regime, please get in touch.

Brexit White Paper: the Roadmap for Brexit

Yesterday, the Government published its white paper (The United Kingdom’s exit from and new partnership with the European Union) setting out the 12 principles which will guide the withdrawal from the EU.  Purporting to confirm Theresa May’s “vision of a truly independent, truly global UK and an ambitious future relationship with the EU”, the document is – unsurprisingly – aspirational in its view of how the Government will be seeking to structure and negotiate the UK’s departure from the Union.  As such, there is little of substance, at this stage, for technology lawyers like us to really sink their teeth into. If you want to get ahead of Brexit with our AI-driven contract analysis tool, click here.

The Government's white paper does contain a number of matters of note for UK businesses:

  • Section 1 (Providing certainty and clarity) re-confirms that the Government intends to introduce a Great Repeal Bill, which will be included in the next Queen's Speech and introduced to Parliament in May or June 2017. This bill will remove the European Communities Act 1972 from the statute book and convert existing EU law into domestic law. This is intended to provide UK businesses with legal certainty going forward – essentially the same rules and laws will apply the day after Brexit, as they did before, wherever practical and appropriate. Whilst this clarity will be welcomed, it should be noted that the Government states that rules will not change “significantly” overnight: it will therefore be important to monitor developments over the next 2 years, in particular the publishing of the white paper on the Great Repeal Bill, to identify any changes of note.
  • Section 4 focuses on protecting the Common Travel Area, and confirms that the Government aims to maintain a “seamless and frictionless a border as possible between Northern Ireland and Ireland”. No further substantive detail is provided, other than to confirm that the Government will work hard to ensure that it finds “shared solutions” to “economic challenges” and to “maximise the economic opportunities for both the UK and Ireland”.
  • Section 5 considers likely approaches to immigration once the Free Movement Directive no longer applies to the UK.  The Government recognises that this is a complex area, and has undertaken to ensure that businesses will have the opportunity to provide their views before any final decision is made.  The white paper acknowledges that a phased implementation of any new arrangements may be appropriate to allow businesses and individuals time to adjust.  Section 6 focuses on the related theme of how best to secure the status of the 2.8 million EU citizens currently living in the UK, and the 1 million UK nationals who are long-term residents.  The Government regards this as an early priority as part of the overall negotiations, highlighting as an example the importance of access to healthcare for EU citizens in the UK and vice versa.
  • Section 7 (Protecting workers’ rights) sets out the Government’s commitment to an ongoing protection of worker rights.  The white paper highlights a number of areas in which domestic UK legislation already goes beyond the legal minimum required by EU law, including annual leave, maternity leave and pay, and parental leave.  The Government does not envisage any immediate changes as a result of the UK leaving the EU, but refers to an independent review of employment practices in the modern economy and a green paper on corporate governance, both of which are currently underway.
  • Section 8 (Ensuring free trade with European markets) highlights the importance of the UK’s financial services and other business services sectors in terms of their export value.  The charts contained within the section give a clear indication of such services being central to any trade arrangement with the EU; in 2015, UK exports of financial services to the EU accounted for over £22 billion while exports of other business services were even greater.  No wonder the white paper states that the Government will be aiming for “the freest possible trade” in services (whether business or financial) between the UK and EU member states.
  • Withdrawal from the single market would almost certainly result in UK firms losing the right to offer financial services across the EU by "passporting" into EU states. The white paper acknowledges that UK firms benefit from the passport regime and pledges that the Government "will seek to establish strong cooperative oversight arrangements with the EU". Presumably this means that the UK will seek to take advantage of the existing third country equivalence regimes in EU legislation; however these relate only to some (wholesale) financial services. Therefore any arrangement in relation to the majority of financial services will need to be agreed as part of the negotiations between the UK and the EU. Further details may be provided in the forthcoming white paper on the Great Repeal Bill.
  • The Government recognises that a high quality, stable and predictable regulatory environment is important, especially around data transfers in the FS, tech and energy sectors which the government intends to maintain. Digital Economy Minister Matt Hancock MP reiterated the Government’s commitment to the implementing the General Data Protection Regulation earlier in the week, as it is considered to be a robust piece of legislation facilitating unhindered data flows.
  • Focus is also placed on ensuring that the UK will “remain at the forefront of collective endeavours to better understand, and make better, the world in which we live” (a somewhat grandiose way of emphasising support for UK innovation and technology).  Little further information is given on how the Government proposes to achieve this (other than a wish to continue to collaborate with European partners on science and technology initiatives), but the ambition to “do more to commercialise the world-leading ideas and discoveries made in Britain” will certainly be something to watch – especially given the difficulties growing UK tech business can face in raising UK capital.   
  • It has been cited by Brexit supporters that one of the key benefits of leaving the EU will be the UK regaining its ability to strike free trade agreements with other countries (a practice currently prohibited by virtue of its membership of the EU). The white paper is, unsurprisingly, keen to emphasise that, whilst the EU remains an “important” trading partner of the UK, other global markets such as Asia and the Americas are of increased importance to the UK’s economic prosperity. Whilst commentators will no doubt disagree as to the level of likely opportunity afforded by these new markets, the key point is that the UK will not be able to agree new trade deals until it has left the EU, even if the white paper correctly points out that a level of preparatory work can be undertaken at this stage. 

In respect of the UK’s membership of the WTO, the white paper reconfirms that the UK will be establishing its own WTO schedules in goods and services at the WTO, so that UK businesses have clarity around the terms of their access to overseas markets around the world, post Brexit. The aim is to broadly replicate the UK’s current position as an EU member state. 

Drone popularity soars - but safety issues remain unresolved

2016 has seen the popularity of drones continue to grow but, as drone sales increase, concerns over safety have also grown.

In September a passenger plane was in a near-miss with a drone as it came in to land at Birmingham Airport.[1]   The UK Airprox Board (UKAB) report states that “the drone operator, by operating at that position and altitude [around 500ft] on the approach path to Birmingham airport, had flown the drone into conflict and had endangered the DH8 and its passengers."  The incident followed near-misses at Manchester and London earlier in the year[2], and the unauthorised operation of drones in close proximity to commercial airlines and airports is on the rise.

These events were some of 60 near-misses in British skies over the last twelve months, according to UKAB data. This number has risen from 6 incidents in 2014 and 29 in 2015. 

Civil Aviation Authority (CAA) rules require that drones may not be operated above 400ft nor in proximity to airports.  

The increase in near-misses tracks the growing popularity of the devices.  Although reliable sales data is unavailable in the U.K. at present, in the U.S. the Federal Aviation Authority reported that twice as many drones were expected to be sold in 2016 compared to the previous year.[3]  In the U.K., Maplin cited greater drone sales as contributing to its increase in sales against the previous year.[4]  The growth in drone sales amongst hobbyists corresponds to increased investment by commercial operators, as the number registered with the CAA grew from around 1,300 companies at the end of 2015 to 2,380 at the beginning of 2017.[5]

In response to concerns over safety, the government has considered introducing new laws to regulate the technology.

Towards the end of 2016, the CAA produced a “Dronecode” attempting to simplify the rules for hobbyists in advance of the expected clamour for the must-have Christmas gift.[6]  The release of the Dronecode comes as the government continues its plans to introduce comprehensive regulation to address safety concerns, a process which commenced with a wide-ranging public dialogue which was completed in February 2016.[7]

The Department for Transport is now inviting responses to its public consultation[8], which sets out some detailed proposals, and which may ultimately give rise to new legislation.  The consultation is open until 15 March 2017.

The consultation focusses, in particular, on three key areas and which are likely to be impacted by any future regulation:

  • Registration of all drone users (presently there is a requirement for all commercial drone operators to register with the CAA).
  • Regulate the provision of guidance to drone operators to ensure that operators are aware of the Dronecode and other applicable rules.
  • Require drone users to take out insurance (noting that EC Regulation 785/2004 already requires all drone operators to take out insurance unless the drone is used for leisure and weighs less than 20kg).

Parties with an interest in drone regulation, whether looking to enhance or dilute such regulation, should use the coming weeks to make their views known as part of the consultation.

To read more on existing drone regulations, please refer to our article Drone law: heading into turbulence? 


[1] http://www.bbc.co.uk/news/uk-england-birmingham-38774718

[2] https://www.theguardian.com/uk-news/2016/dec/09/two-near-misses-renew-fears-drones-major-air-accident-manchester-london

[3] http://www.chicagotribune.com/bluesky/technology/ct-drone-sales-christmas-wp-bsi-20161224-story.html

[4] http://www.toynews-online.biz/news/read/maplin-rides-high-on-uk-s-drones-demand/045878

[5] http://publicapps.caa.co.uk/docs/33/RptUAVcurrent20170117.pdf

[6] http://dronesafe.uk/wp-content/uploads/2016/11/Dronecode.pdf

[7] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/579550/drones-uk-public-dialogue.pdf

[8] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/579562/consultation-on-the-safe-use-of-drones.pdf

Fintech regulation likely to increase, warns Governor

Mark Carney, the Governor of the Bank of England and Chair of the Financial Stability Board, has warned of a likely increase in regulation for Fintech firms due to the “systemic risks” they pose to the banking sector and the wider economy. Speaking at the Deutsche Bundesbank G20 conference, Mr. Carney noted that “the history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts."

Fintech has been instrumental in revolutionising the financial markets in recent years. There has been widespread investment by many banks in blockchain, the distributed ledger technology that underpins the digital currency Bitcoin. Many banks are looking at the application of blockchain to transactional systems as well as anti-money laundering, by enabling encrypted KYC data to be shared among banks in near real-time, while maintaining a historical record of all documents shared and changes made.

Carney warned that the rise of blockchain technology was being watched closely by the FSB and that “fintech innovations, such as distributed ledgers, will need to meet the highest standards of resilience, reliability, privacy and scalability.”

Carney accepted that peer-to peer lending (also known as P2P, crowdlending or loan-based crowdfunding), which represents about 14% of new lending to small businesses in the UK, “does not, for now, appear to pose material systemic risks”. This might reflect the fact that P2P is already regulated by the Financial Conduct Authority and is in line with the UK government’s introduction last April of the new Innovative Finance ISA, which enables retail investors to hold P2P investments in a tax-free wrapper. However, P2P lending, which is regulated by the FCA, is likely to remain on the regulatory radar for some time to come; shortly before the launch of the Innovative Finance ISA, Lord Turner, the former head of the FCA, accused P2P platforms of not doing proper checks on their borrowers.

Carney also suggested that new risks could arise in relation to robo-advice if robo-advisers or high-frequency traders have a high correlation with each other, leading to "flash crash" situations. The FCA recently established an automated advice unit, to help ensure that robo-advice achieves the same the same outcomes for consumers as face-to-face advice, while stimulating a more engaging and cost-effective market.

The likelihood of increased regulation underlies the need for Fintech firms to ensure they understand their regulatory obligations and engage as soon as possible with the regulator in order to influence upcoming changes and ensure they reflect the underlying technology.

Supreme Court rules Government cannot trigger Article 50 without consulting Parliament

On 24 January 2017 the Supreme Court ruled that the Government cannot trigger Article 50 without an Act of Parliament.[1] 

In so doing, the Supreme Court upheld the High Court’s judgement of 3 November 2016 which we reported on previously[2].  The Secretary of State for Exiting the European Union had appealed the High Court’s ruling and the principal question in the appeal before the Supreme Court was whether a notice of intention to withdraw from the EU could, under the UK’s constitutional arrangements, lawfully be given by Government ministers without prior authorisation by an Act of Parliament.  The Supreme Court’s answer was no. 

The Supreme Court held that, under the UK’s constitutional arrangements, an Act of Parliament is required to authorise ministers to give notice of the UK’s intention to withdraw from the EU.  It held that it would be unlawful for the Government to rely on its executive power given by the royal prerogative to implement the outcome of the June 2016 referendum without consulting Parliament.  While the Government generally has a prerogative power to change treaties, the Supreme Court ruled that the Government’s prerogative powers may not extend to acts which result in a change to UK domestic law.  The Supreme Court held that withdrawal from the EU Treaties makes a fundamental change to the UK’s constitutional arrangements and the UK constitution requires such changes to be effected by Parliamentary legislation. 

This judgement by the Supreme Court – the final court of appeal in the UK for civil cases - affirms the ruling of the High Court and dismisses the appeal by the Secretary of State for Exiting the European Union by a majority of 8 judges to 3. 

In addition, the Supreme Court considered the ‘devolution issues’, in other words whether the terms of the Northern Ireland Act 1998 and associated agreements, require primary legislation and the consent of the Northern Ireland Assembly and/or the people of Northern Ireland before a notice of intention to withdraw from the European Union can be served by the UK.  The judges of the Supreme Court reached a unanimous decision on this point and concluded that the devolved legislatures do not have a veto on the UK’s decision to withdraw from the UK. 

It appears that the Government has already prepared draft legislation in the event that its appeal was rejected and the Prime Minister has confirmed that the Government will publish a White Paper setting out its plan for leaving the EU.  The White Paper is expected imminently.  The ‘Brexit bill’ that follows is expected to be short and is expected to be given special priority by Parliament.  The Supreme Court’s ruling means that the bill must be read, debated and examined, including discussing proposed amendments, in both the House of Commons and the House of Lords before it can pass into law. 

For more information, please contact Shirine Corboy.


[1] https://www.supremecourt.uk/news/article-50-brexit-appeal.html, R (on the application of Miller and another) (Respondents) v Secretary of State for existing the European Union (Appellant), Reference by the Attorney General for Northern Ireland – In the matter of an application by Agnew and others for Judicial Review and Reference by the Court of Appeal (Northern Ireland) – In the matter of an application by Raymond McCord for Judicial Review, on appeals from [2016] EWHC 2768 (Admin) and [2016] NIQB 85

 

 

 

Insurers to compensate victims of collisions with driverless cars

Motor vehicle insurers will be responsible for paying compensation to innocent third party victims of collisions involving driverless cars under new plans outlined by the Government this month. 

On 12 January 2017, the Government published its Response to its Consultation on proposals to support Advanced Driver Assistance Systems and Automated Vehicles which was launched by the Centre for Connected and Autonomous Vehicles last year.  https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/581577/pathway-to-driverless-cars-consultation-response.pdf 

The Government initially proposed extending current product liability regimes to cover autonomous vehicles (“AVs”) which are expected to reach the market in the next 5 years. However, in response to feedback received in the Consultation outlining problems with the ability of product liability frameworks to provide appropriate remedies, the Government has now decided to change motor insurance laws to include the use of AVs. 

The present UK motor vehicle insurance model is based on insuring the driver of the vehicle, rather than the vehicle itself. The Government Response acknowledges that while this approach has worked well for conventional vehicles, this does not work as well for AVs and it proposes an alternative insurance model for AVs.

This is the “single insurer model”.  It is intended to provide innocent victims of a collision involving an AV with a clear and quick route to securing compensation and provide clarity to consumers and manufacturers of AVs around the applicable insurance requirements as and when AVs become available. 

Under the single insurer model, an insurer would cover both the ‘driver’s’ (being the person responsible for the AV) use of the vehicle and the AV technology, so the driver is covered both when they are driving and when they have activated the automated driving function (“ADF”).  When a collision is caused by an AV where the ADF was active, the insurer would be liable to pay compensation to both the innocent third party victim and the AV driver (if they are injured in the vehicle). 

The insurer will only be able to exclude its liability to the injured AV driver if the collision resulted from the driver either –

  1. having made unauthorised modifications to their vehicle’s operating system; or
  2. failing to install required updates to the software for the vehicle’s operating system.

Readers familiar with software licensing models will notice that this approach has parallels with exceptions to liability that software licensors often stipulate in software licences - software licensors typically exclude their liability for failures arising from modifications to the software not made by the licensor and failure by the customer to install updates issued by the licensor. 

The Government proposes that this is the only condition placed on this new statutory liability. Importantly, the insurer will not be able to exclude payment of compensation to a victim if the AV caused the crash as a result of the AV being hacked by a third party. 

Where the manufacturer is found to be liable, the insurer will be able to recover against the manufacturer under existing common law and product liability laws. The Government Response notes that insurers would only ultimately need to cover the cost of the claims that they are not able to recover from the manufacturer, for example, if the manufacturer was able to successfully use the ‘state of the art’ defence under a product liability claim that it could not have known about a particular danger or hazard in a product by using the scientific or technical knowledge available at the time the product was made or sold. 

Following the Response, the next step is for the Government to take these insurance proposals forward into the Modern Transport Bill, which is due to enter the Houses of Parliament this year. This will include a definition of AV, and the Government proposes to give the Secretary of State for Transport the power to publish a list classifying the vehicles or type of vehicles that are to be regarded as AVs and will be subject to the new insurance requirement. The Government has said it will continue to regulate in a rolling programme of reform.  We can therefore expect further clarification in the regulation of AVs from the Government in the coming months. 

For more information, please contact Shirine Corboy. Read more on driverless car regulation here.

 

 

Star Polaris case: "consequential loss" given wider meaning by High Court

Over the years, the words “consequential loss” have acquired a well-recognised meaning, with the Court of Appeal repeatedly affirming that where they are used in a contract (on a stand alone basis) to exclude one of the parties’ liability for consequential loss, they mean only that loss which is recoverable under the second limb of the Hadley v Baxendale[1]remoteness test”.

In Hadley v Baxendale the courts were asked to consider the extent to which losses could be recovered before becoming too remote.  In doing so, they identified two types of losses which a party can recover from the defaulting party in the event of a breach of contract:

  1. “Direct” losses (limb 1 of the test):  losses which arise naturally, i.e. according to the usual course of things, from the breach in question, or, that may reasonably be supposed to have been in the contemplation of both parties at the time the contract was made, as a probable result of the breach of it (i.e. loss which a reasonable person might expect would result from the breach under ordinary circumstances) – an objective test; and
  2. “Indirect” or “consequential” losses (limb 2 of the test):  losses which result from special circumstances, and will only be recoverable if such losses have been communicated to the defaulting party at the time when the contract was formed – a subjective test.

Any losses which fall outside these two limbs are not recoverable as they are too remote.

The meaning of consequential loss was again at the centre of a dispute between the parties in the recent case, Star Polaris LLC v HHIC-Phil Inc.[2]. On Appeal from a Tribunal Award dated 12 November 2015, the High Court of Justice (Commercial Court) was asked to consider the construction and meaning of the phrase “consequential loss or special losses, damages or expenses” in the context of a limitation of liability clause included in a shipbuilding contract[3].

Star Polaris:  the facts

In this case, Star Polaris LLC (the “Buyer”) and HHIC-PHIL Inc. (the “Shipbuilder”) entered into a contract for the construction of the STAR POLARIS (the “Vessel”). Under the contract, the Shipbuilder gave a 12 month guarantee of material and workmanship.  During this guarantee period, the Vessel suffered a serious engine failure and had to be towed to a shipyard in South Korea for repairs. The Buyer pursued a claim in arbitration against the Shipbuilder for breach of contract, and claimed the following damages: (i) the cost of repairs to the Vessel; (ii) towage and other fees caused by the engine failure; and (iii) diminution in value of the Vessel.

The extent of the Shipbuilder’s liability for defects and the Buyer’s remedies were set out in Article IX of the contract:

  • The Shipbuilder provided a 12 month warranty in Article IX.1 against (broadly) all defects due to defective materials, design error, construction miscalculation and/or poor workmanship. 
  • Article IX.3 obliged the Shipbuilder to remedy any defects which were the subject of the guarantee by making all necessary repairs and replacements at the shipyard. 
  • Article IX.4(a) stated that “…the Shipbuilder shall have no liability or responsibility whatsoever or howsoever arising for or in connection with any consequential or special losses, damages or expenses unless otherwise stated herein”.
  • In addition and notably, Article IX.4(d) stated that the guarantees included in Article IX replaced and excluded any other liability, guarantee, warranty and/or condition imposed or implied by statute, common law, custom or otherwise on the part of the Shipbuilder.

The Buyer contended that the words the parties had chosen to use (i.e. “consequential losses”) had, at the time the parties entered into the contract, an established meaning as a matter of law, namely, losses which fell within the second limb of the rule in Hadley v Baxendale.  The Buyer asserted that the parties contracted against the background of this well-established meaning[4].

The decision

Whilst the Arbitrators accepted that, on the authorities, the meaning of “consequential loss” in an exemption clause usually meant the exclusion of losses falling within the second limb of Hadley v Baxendale, they affirmed they were not necessarily bound to follow such decision[5]; any particular clause must be “construed on its own wording in the context of the particular agreement as a whole and its particular factual background”[6].

The Buyer and Shipbuilder agreed that Article IX provided a “complete code” for determining liability, and both the Tribunal and the High Court considered the existence of this code to be of fundamental importance to understanding the scope of Article IX. – In this case, it was not a question of simply determining what liability was excluded, but ascertaining what liability was actually undertaken[7]. The only positive obligations assumed by the Shipbuilder under the guarantee were the repair or replacement of defects and physical damage caused by such defects, and all other losses (financial or otherwise) were expressly excluded[8] by Article IX.4(d).

The High Court agreed with the Arbitrators’ decision that, in the context of this contract, consequential or special losses had a wider meaning than the second limb of Hadley v Baxendale. The word “consequential” was not used in the well-established sense in this case, but in a “cause and effect” sense, and referred to those losses which followed as a result or consequence of physical damage/engine failure (i.e. additional financial loss other than the cost of repair or replacement)[9]. In addition, there was no express provision that the Buyer could point to which gave rise to a claim for financial loss, lost profit or diminution of value[10]. Accordingly, the Buyer’s appeal was dismissed.

Lessons learned

The Star Polaris case does not change current law. It does, however, demonstrate that exclusion of liability wording which has a widely accepted meaning in law may not necessarily be construed in the same way as it has been in previous cases if the context or factual matrix in question is different and the parties intended a different meaning should apply. Specifically, there is a danger that the words “consequential loss” will not be given the meaning laid down in the second limb of the well-recognised rule in Hadley v Baxendale, depending on the facts of the particular case.

Applying the lessons learned from the decision in Star Polaris, businesses and contract drafters should bear in mind the following points when negotiating exclusions and limitations of liability in commercial agreements:

  • do not mechanistically replicate precedent exclusion of liability wording.  Only include precedent limitation of liability wording in a contract after having given its meaning careful consideration in the context of the agreement in question;
  • identify what type of loss the business concerned is most likely to suffer in the context of the contract being negotiated, and clearly and unambiguously set out in the agreement any losses which the parties intend will be recoverable (and whether they will fall within any agreed cap on liability) and those losses which will be excluded;
  • as a reminder, “loss of profits” can (depending on the circumstances) be classified as a direct or an indirect loss in contracts subject to English law.  In the case where a party is seeking to exclude liability for loss of profits, the parties should, therefore, make it clear whether they intend excluding liability for both direct and indirect losses of this type, or just indirect loss of profit.  Contrast the position in contracts subject to U.S. law where loss of profits is typically classified as an indirect loss and will therefore not be recoverable if a clause of the contract excludes indirect or consequential losses; and
  • bear in mind the contra proferentem rule – i.e. where the wording of an exclusion clause has been drafted ambiguously, it may be interpreted against the person seeking to rely on it.

Concluding thought

It is not yet clear whether the decision in Star Polaris will be used by the courts as grounds for moving away from the widely-accepted (but very technical) meaning of “consequential loss” in the second limb of Hadley v Baxendale in the future. This could be the case, particularly as a number of legal commentators and the courts have challenged the appropriateness of this rule. For example, Lord Justice Moore-Bick in Transocean Drilling U.K. Ltd v Providence Resources Plc[11] said of the leading authorities which support the established meaning of consequential loss “it is questionable whether some of those cases would be decided in the same way today, when courts are more willing to recognise that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents”.

 

[1] 1854 EWHC 9 Exch 341

[2] 2016 EWHC 2941 (Comm)

[3] The shipbuilding contract was a based on the Shipbuilders Association of Japan (“SAJ”) standard form contract, as varied by the parties.

[4] Paragraphs 9 and 10 of the Judgment

[5] Unless the particular contractual provision with which they were concerned had been the subject of specific judicial consideration.

[6] Paragraph 24 of the Judgment.

[7] Paragraph 10 of the Judgment.

[8] Paragraphs 36 and 38 of the Judgment.

[9] Paragraphs 36, 38 and 40 of the Judgment.

[10] Paragraph 38 of the Judgment.

[11] 2016 EWCA Civ 372, at paragraph 15.

The draft ePrivacy Regulation: 10 things you need to know

On 10 January 2017 the European Commission published its draft Regulation on Privacy and Electronic Communications (the ePrivacy Regulation), which is intended to replace the existing ePrivacy Directive (Directive 2002/58/EC). Here are 10 things you need to know about the ePrivacy Regulation:

  1. Regulation not a Directive – like the General Data Protection Regulation (GDPR), as a Regulation it will be directly applicable across all of the EU, meaning that there will be one uniform set of rules across all Member States - there’s no scope for Member States to vary the terms of the ePrivacy Regulation locally.
  2. Interoperability with the GDPR – it relies on many of the definitions in the GDPR. Security obligations are now dealt with in the GDPR (and no longer separately addressed in the ePrivacy Directive). The ePrivacy Regulation covers more than just personal data processing and so goes beyond the GDPR to guarantee the confidentiality and integrity of users' devices (i.e. laptop, smartphone, tablets).
  3. More businesses caught – it will apply to all providers of electronic communications services, publically available directories and software providers permitting electronic communications. This means that ‘over-the-top’ web service providers such as WhatsApp, Facebook Messenger, Skype, Gmail, iMessage, and Viber, as well as traditional telecoms companies, will all need to comply. This is designed to level the playing field (as the ePrivacy Directive only applied to telecoms companies).
  4. Extraterritoriality – it covers electronic communications data processed in connection with the provision and use of electronic communications services to end-users within the EU - so the provision of an electronic communications service from outside the EU to an individual in the EU will be covered.
  5. Consent – it requires that consent be necessary to access information on a user's device (“terminal equipment”), as well as for the use of more privacy-intrusive cookies or other technologies to access information stored on computers or to track online behaviour. It’s been clarified that such consent may be obtained using technical/browser settings (instead of using banners / pop-ups), provided that the higher standards set out in the GDPR are met. This means that consent will only be valid if individuals have a genuine and free choice and are able to refuse or withdraw their consent without detriment.
  6. Simplified cookies rules – it confirms that consent will not be needed for non-privacy intrusive cookies improving internet experience (e.g. cookies needed to remember shopping cart history, for filling in online forms over several pages, or for the login information for the same session). Cookies set by a visited website counting the number of visitors to that website will also no longer require consent.
  7. Spam and direct marketing – it stipulates that Users will need to give consent before unsolicited commercial communications are addressed to them, regardless of the technology used.
  8. Privacy by design – in line with the GDPR, privacy by design is a key feature in the ePrivacy Regulation and many companies will need to make changes to comply. For example anonymisation is mandated where personal data is not needed to provide a service, and software permitting electronic communications will need to tell users about the privacy settings options upon installation and require users to make a selection (for software that is already installed, this will need to be implemented on the first update and no later than 25 August 2018).
  9. Enforcement – For consistency, Data Protection Authorities in Members States will be responsible for enforcing the ePrivacy Regulation.
  10. Fines – it operates in line with GDPR with potential fines increasing to up to EUR20 million or 4% of worldwide turnover, whichever is the greater.

It’s intended that the ePrivacy Regulation will apply from 25 May 2018 - the same date from which the GDPR will apply. It should though be noted that the draft Regulation is likely to be amended whilst it makes its way through the EU’s legislative process.

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