How you can be right but still negligent

 The case of Richards & Anor v Speechly Bircham LLP & Anor [2022] EWHC 935 (Comm) is a cautionary tale for solicitors advising on corporate transactions.

The Defendant Solicitors advised the Claimants on a sale of their cloud-based communications technology company to a private equity investor, where they received £2.3M each in cash plus shares in the buyer Newco and stayed on to manage the company until a planned exit.  Just over 8 months later they had been summarily dismissed from their employment and their shares in the Newco were compulsorily transferred for £1 each on the basis they were "Bad Leavers".

They brought High Court proceedings claiming wrongful dismissal, which they won.  That made them "Good Leavers", but they still received nothing for their shares because May J decided in a subsequent judgment on quantum that the correct interpretation of the Articles was that the "Redemption Premium Provision" (RPP) in Article 13.3 (which allocated the first £11.5M on an Exit by a Share Sale to the private equity investors - this being twice their investment) also applied to the determination of Market Value on a compulsory sale under Article 18.4.1.  The RPP was a negotiated compromise on another commercial point.  As Market Value of the Company at the point they were dismissed was still less than £11.5M, they therefore received nothing for their shares even though they had now been held to be Good Leavers.

They appealed against this judgement, but settled for £87,500 each before the appeal could be heard.

They next sued their solicitors for negligence, including for failing to advise them that the RPP would apply to the calculation of Market Value for a Good Leaver.  They claimed a loss of £1.9 to 1.7M each on their shares plus £895,141.63 between them for the costs of the costs of the previous proceedings re quantum.

These were complex proceedings raising a number of issues, which resulted in a 515 paragraph carefully-considered judgement by HHJ Russen QC, sitting as a High Court judge.  For present purposes, one of the solicitors' points of defence was that May J had construed the Articles incorrectly - so their advice had been correct and the loss was not caused by their advice.  The Claimants, on the other hand, now argued in favour of May J's interpretation of the Articles (contrary to their position in the previous proceedings, in which they had lost on the point but appealed).

HHJ Russen QC agreed with the Defendant solicitors that May J's interpretation of the Articles was incorrect.  The RPP applied on the distribution of the proceeds of a Share Sale between the shareholders.  But what was required under Article 18.4.1 was for the valuer to decide the Market Value of the Company on a hypothetical sale and then divide it by the number of shares to give a price per share.  This was not a Share Sale on an Exit and the price paid by the hypothetical buyer would not be determined by the provisions in the Articles about division of proceeds between the different classes of shares.

But he still held the solicitors liable for negligence, despite having held that their interpretation of the Articles was correct.  He accepted the Claimants’ evidence that they had repeatedly raised with the solicitors their concern that their equity in the company should be protected  ("Adam, tell me how we're going to get f**ked?") and "the reasonably competent solicitor would have questioned the implications of the wording of article 18.4.1 when viewed against the RPP and, having done so and thereby unearthed the principal points of construction addressed in the Quantum Judgment and by me above, highlighted the resulting risk and suggested that an attempt be made to eliminate it."  If they had done so, the Claimants would have instructed them to make that attempt, failing which there was a good chance they would have walked away and found another buyer on terms that did not include the RPP.

Damages were ordered in favour of the Claimants in the combined sum of £1.454m.

Although it seems counter-intuitive from a solicitor's point of view that your interpretation of a document can be correct but you can still be negligent, the point is that the solicitors here were instructed to advise on significant risks and this was an unlikely, but significant risk (as shown by the previous judge having reached a different conclusion when the point was fully argued before her).  In other words, the solicitor should have told them how they might get f**ked.

This is a good example of why solicitors often advise along the lines of "I think it means X but it’s arguable that it means Y instead, so we should try to clarify it for the avoidance of doubt."  In practice you can't always avoid the doubt, as wording is often a negotiated compromise, but you should then advise your client as to the risk that your interpretation may either be wrong or that it might cost a lot in court proceedings to prove it is right…

Are Damages Claims for Data Breaches Viable?

Claiming damages for data breaches has become one of the latest litigation bandwagons.  But recent cases show that it is not as easy to claim compensation for data breaches as some claimant solicitors and litigation funders may like to assert.

In Rolfe and others v Veale Wasbrough Vizards LLP [2021] EWHC 2809 the High Court summarily dismissed a claim against a firm of solicitors over an email sent to the wrong recipient (with a one letter difference in the email address) on the basis that no harm had credibly been shown.  The email was a claim for school fees that the Claimants had failed to pay to the solicitors’ client school and the email only contained the Claimants' names and address, the invoice and their statement of account for the past five years.  The level of school fees was publicly available on the school’s website.  The recipient of the email promptly alerted the solicitors of the error, the solicitors promptly requested they delete the email and the recipient confirmed she had done so.  Master McCloud in the High Court commented:

"What harm has been done, arguably? We have here a case of minimally significant information, nothing especially personal such as bank details or medical matters, a very rapid set of steps to ask the incorrect recipient to delete it (which she confirmed) and no evidence of further transmission or any consequent misuse (and it would be hard to imagine what significant misuse could result, given the minimally private nature of the data). We have a plainly exaggerated claim for time spent by the Claimants dealing with the case and a frankly inherently implausible suggestion that the minimal breach caused significant distress and worry or even made them 'feel ill'. In my judgment no person of ordinary fortitude would reasonably suffer the distress claimed arising in these circumstances in the 21st Century, in a case where a single breach was quickly remedied."

He therefore dismissed the case, as "the law will not supply a remedy in cases where effectively no harm has credibly been shown or be likely to be shown".  For good measure he ordered the Claimants to pay the Defendants' legal costs on the indemnity basis, with an interim payment on account of £12,000.

In Johnson v Eastlight Community Homes Ltd [2021] EWHC 3069 a data breach claim was made in the High Court for damages of £3,000, where the Claimants' solicitors claimed to have already incurred £15,000 in costs and estimated the total costs to be just in excess of £50,000!  The data breach occurred when a provider of low-cost social housing emailed the Claimant’s rent statement to a third party, who notified the Defendant immediately and deleted it as requested within 3 hours.  Slightly more plausibly than in Mr Rolfe's case, the Claimant had moved home to escape an abusive partner and claimed to be anxious about her new address becoming known to her former partner.  But, as Master Thornett noted in his judgment, bringing a public court claim over the matter with no attempt to withhold her address seemed contrary to this claimed subjective response to the Defendant’s disclosure.  He concluded that "By a very narrow margin… I am satisfied that the real point in this case is whether the Claimant's entitlement is to purely nominal or instead extremely low damages.  It is never going to be much more, a point that surely was (or ought to have been) obvious to the Claimant and her advisors from the outset."  The Master therefore transferred the case to the Small Claims Track in the County Court, where only very small fixed costs are recoverable (if the claim is successful).

Both these cases were decided by Masters in the High Court, so they have little precedent value but are indicative of the way the Courts are dealing with this sort of claim over minimal data breaches.

However in Richard Lloyd v Google LLC [2021] UKSC 50 the Supreme Court gave judgment in a case claiming damages for a data breach.  This had been brought under the Data Protection Act 1998 (DPA 1998), the predecessor to the GDPR, but the wording of the current Article 82(1) of the UK GDPR is similar to section 13 of the DPA 1998, so the principles should be the same.

Mr Lloyd was attempting (with the backing of a litigation funder) to bring an “opt out” representative class action on behalf of English & Welsh iPhone users against Google for misuse of private information and breach of the DPA Act 1998 regarding the infamous “Safari Workaround”.  Much of the judgement is about the technicalities of bringing such class actions under English law, which you can’t do (except under the Competition Act).  Mr Lloyd therefore made a clever attempt to use the old Chancery procedure for representative actions, which goes back to the 16^th and 17^th centuries.  The Supreme Court agreed this was OK in principle, but the reason his class action ultimately failed was the need for each claimant represented to establish individual loss for the data breach.  Damages for distress were recoverable in principle for data breaches, but different iPhone users would have suffered different amounts of distress, making the case unsuitable for such a representative action.

Mr Lloyd attempted to get round this by claiming a uniform sum of £750 per person.  If multiplied by the number of people he claimed to represent, this would have made the claim worth about £3billion (which was why this case ended up in the Supreme Court).  He justified this on various bases, including that it was an irreducible minimum harm suffered by every member of the class due to "loss of control" of their data, or that it was “user damages” assessed as an agreed fee for allowing Google to process the personal data.  He won on the loss of control point in the Court of Appeal, but Lord Leggatt, giving the unanimous judgment of the Supreme Court, carefully considered all these arguments and rejected them.  A claim for damages under the DPA 1998 required proof of either material damage (in the sense of some identifiable physical or financial loss) or distress, which had to be distinct from, or caused by, the unlawful processing.

What can we learn from these cases?  A claim by a data subject against a data controller for a data breach involving their personal data is certainly possible, but some actual loss or genuine distress must be proved in order to recover damages.

In cases of minor breaches where the data is not particularly sensitive and the breach has been cured, such loss or distress will be difficult to prove, and even where there is an arguable case it will be a matter for the County Court, where recovery of legal costs will be limited.  The sort of speculative letters that have been written by some claimant solicitors to frighten defendants into settling should therefore be firmly rebutted.

The more serious data breaches (such as where large companies fail to protect consumers’ credit card details from hackers or abuse their data for commercial purposes) are another matter, but even then each claimant will need to establish the loss and distress they have personally suffered, which individually may not be great.  The Supreme Court indicated a bifurcated representative action would be possible, where the representative claimant establishes liability and then members of the class can claim to establish their individual damages.  But there would still be difficulties in arranging funding for such litigation and persuading individual data subjects to bring claims for what may be relatively small amounts with a greater risk of costs.

This may give the impression that there is no real sanction for data breaches.  But the Information Commissioner’s Office still has the power to impose substantial fines under the UK GDPR and reputational damage remains a real concern.

Conflicting Decisions Upheld on Appeal

You might think that if two different employees challenged an employer’s policy on retirement age on grounds of age discrimination before different Employment Tribunals and the two Tribunals reached opposite conclusions as to whether it was discriminatory, the point of a joined appeal of the two cases to the Employment Appeal Tribunal ("EAT") would be to decide which Tribunal was right, so the employer and its staff would know where they stood in future.

However, you would be wrong.  Employment Tribunals have a wide discretion to decide cases on the facts, based on the evidence before them, and the EAT can only overturn their decisions if they have made an error of law or have reached a decision which is perverse on the facts.  If two different Tribunals have reached different conclusions regarding the same retirement scheme on the basis of differing evidence and both have applied the law correctly and come to reasonable (though different) conclusions, then the EAT cannot interfere.

That is what happened in the cases of Pitcher v University of Oxford and St John’s College, Oxford and Ewart v University of Oxford.  The University, and St John’s College, had adopted an Employer Justified Retirement Age ("EJRA") of 67, with a procedure for applying for extensions to the retirement date and subject to future review of the scheme.  The stated aims of the EJRA included (1) promoting inter-generational fairness; (2) facilitating succession planning (in the sense of knowing when vacancies could be expected to arise); and (3) promoting equality and diversity.  The Tribunals also found that these three aims helped achieve a further over-arching objective of safeguarding high academic standards.  These were all upheld as legitimate aims which could be used to justify what would otherwise be direct age discrimination, but the University also had to show that the EJRA was justified as being a proportionate method of achieving those legitimate aims.  This is where the evidence presented to the two Tribunals, and so the conclusions they reached, differed.

Professor Pitcher was an Associate Professor of English Literature.  His application for an extension when he reached 67 was refused by the University and St. John’s College, and he was compulsorily retired.  The Tribunal in his case considered the evidence of the factors considered in establishing the scheme and its first 3 years of operation, and found the EJRA was justified.

Professor Ewart was an Associate Professor in Atomic and Laser Physics. He succeeded in obtaining a two year extension to his retirement age, but his application for a second extension was refused.  Crucially, he submitted in evidence his own statistical analysis of the increase in vacancies as a result of the EJRA, which showed that it was only a trivial 2-4%.  The University had not carried out its own analysis and did not submit any evidence of its own as to the effect of the EJRA in increasing vacancies.  As the legitimate aims were to create vacancies for a younger, more diverse cohort of academics, the Tribunal in Prof. Ewart’s case found that the discriminatory effect was disproportionate to the extent to which the legitimate aims were achieved, and therefore found the EJRA was not justified.

Prof. Pitcher was therefore not discriminated against, but Prof. Ewart was - by the operation of exactly the same scheme.  The fact that Prof. Ewart obtained one extension was not material (and if anything you might think that made his case less discriminatory).

The EAT could find nothing wrong with the decision of either Tribunal - on the basis of the evidence on the crucial issue of justification before them, and therefore upheld both decisions, despite their conflicting results.

This shows the limitations of appeals.  But where does it leave the University, or indeed other employers trying to decide how to implement non-discriminatory retirement policies?

Well, it seems Prof. Ewart had the better evidence.  Being a science Professor clearly helped here.  So, unless the University can produce a better statistical analysis which does show it is achieving its aims, it will need to rethink its retirement policy.

For other employers, the aims of inter-generational fairness, succession planning and promoting equality and diversity have all been upheld as legitimate ones, and safeguarding high academic standards could be rephrased as safeguarding high standards of performance in other appropriate industries (e.g. in law firms).  But the tricky question remains of how do you implement them in a proportionate manner?  Monitoring the scheme you do adopt and carrying out some statistical analysis, and amending the scheme based on the results, appears to be one way of doing it.  I do wonder though how many such schemes will achieve results of significantly better than a 4% increase in vacancies becoming available for younger generations?

Mr Green hits the Jackpot

The case of Green v Petfre (Gibraltar) Ltd (t/a Betfred) hit the headlines recently, when Andrew Green succeeded, after a 3 year battle, in recovering his winnings of £1,722,500.24 from a game on Betfred’s online casino.

Mr Green played a game called ‘Frankie Dettori's Magic Seven Blackjack’, in which he could place side bets on ‘trophy cards’.  The game was licensed to Betfred by Playfair in Gibraltar and (unknown to the parties) a software error stopped the game resetting as intended, so that Mr Green ended up with many more trophy cards than he should have.  The chance of a player achieving the jackpot of 7777 times the side bet stake should have been 0.00018361%, but Mr Green had won the jackpot three times before he eventually stopped betting at 5:58 am.  When Mr Green attempted to cash in his virtual chips, Betfred investigated and eventually refused to pay out, citing various exclusions of liability in their online terms and conditions.

Mr Green eventually obtained summary judgement from Mrs Justice Foster in the High Court to strike out Betfred’s defence based on the terms and conditions as having no realistic prospect of success.  Apart from the interesting facts of the case, it also provides a useful illustration of the Courts’ approach to online terms and conditions in a consumer case.

The Betfred terms and conditions were accepted by Mr Green clicking an ‘Accept’ box when he first opened an account with Betfred several years previously.  There was no dispute about their acceptance – Mr Green was even suing on one of the terms and conditions to recover his winnings.  The problem was whether the particular exclusions on which Betfred relied were effective.

The full terms and conditions here consisted of the Terms and Conditions, which were 32 pages long (if printed), an End User Licence Agreement of 9 pages and Game Rules for the particular game of 6 pages.  The Terms and Conditions document in particular was poorly drafted, with what the judge described as a number of infelicities of presentation. It was iterative and repetitive, in places the numbering was absent or inconsistent and it contained typographical mistakes.  The frequent use of capitalisation of whole clauses served, in the judge’s view, to obscure rather than highlight key provisions.

The judge’s conclusions were that:

• As a matter of contractual interpretation the wording of none of the exclusions relied upon by Betfred was sufficient to exclude liability for the particular error that occurred.  Their meaning was unclear, but they appeared to be directed to hardware or communications errors, rather than a behind-the-scenes software error of this kind.  What happened was possible if the game were functioning correctly – just very, very unlikely.
• The manner in which the exclusion clauses were presented and Betfred’s failure adequately to draw them to Mr Green’s attention meant that they were not incorporated in the contract.  Although it is unlikely a punter would ever read these clauses, they needed to be drafted so as to bring them to his attention if he did.
• As this was a consumer contract under the Consumer Rights Act 2015, Betfred was not entitled to rely on the exclusions because they were not transparent or fair.

The exclusions therefore failed for three different reasons.  In addition, Betfred’s defence based on the doctrine of mistake also failed, because any mistake did not render the contract incapable of performance, just less advantageous to one party.

Cases like this always turn on their particular facts, but this case shows the dangers of poorly drafted terms and conditions, particularly when dealing with a consumer.  When drafting, you need to think carefully about exactly what liability your client wishes to exclude, draft clearly to cover it and signpost it to the reader.  If you must use CAPITALS, do it very sparingly or they could well be counter-productive.  When you have done all this, you may well have satisfied the transparency requirement of the Consumer Rights Act, but you will still have to persuade a Court that the exclusion is fair.  Maybe a clearly drafted exclusion of liability for obvious software errors would be fair, but an error like this which produced a possible but highly unlikely result seems trickier to argue it would be fair to exclude.  The punter will simply assume it his lucky day, rather than that it must be a software error.

What we don’t know is whether Playfair’s business to business exclusions of liability in their contract with Betfred proved effective.

Can a funder be liable for refusing to provide further funds to a company?

Often limited companies are undercapitalised, relying on a funder’s willingness to lend further money when needed in order to stay solvent.  The funder is typically a holding company or the individual behind the company.  The funder may be under no legal obligation to provide further funds when required by the company, and accounts are prepared on a going concern basis on the mere expectation they will do so.

Third parties contracting with such an undercapitalised limited company would be well-advised to seek guarantees from the funder, but in practice funders are often unwilling to give guarantees.  The perils of contracting with such a company without a guarantee were revealed by the case of Palmer Birch (A Partnership) v Lloyd & Another [2018] EWHC 2316, as the judge in that case noted in his judgment.  As he went on to say, the case “also reveals less directly the potential pitfalls for those individuals who choose to operate through the medium of such a limited company which proves not to be good for its contractual obligations, including those who may have directed its affairs from the shadows (or quite openly but perhaps not quite constitutionally).”

Michael Lloyd had acquired a mansion house in Devon through a corporate structure and was refurbishing it to serve as his English home and for proposed business activities of corporate hospitality, conferences, educational purposes, shooting and grazing.  The freehold of the property was owned by Seizar Holdings Limited, a Cypriot company, which granted a 21 year lease to Hillersdon House Limited (“HHL”), an English company of which Michael’s brother Christopher was sole shareholder and director.    HHL contracted with the Palmer Birch partnership for the refurbishment at a contract sum of just over £5M.  This structure enabled HHL to recover the VAT on the building works, which Michael personally could not have done.  Michael funded the project through a £5M loan facility to HHL, which was in turn part financed with his bank.

By December 2014 the project was running over time and over budget and Michael was running out of patience and of money, though further funds were expected when a property development in Kenya produced a return on his investment.  Invoices from the contractor went unpaid and by a solicitors’ letter of 22 April 2015 HHL gave notice to terminate the building contract, purportedly on the basis of its own insolvency.  As the contract only allowed termination on the basis of the other party’s insolvency, this was of itself a repudiatory breach of contract.  Subsequently a new company, Country Sporting Experience Ltd. (“CSEL”), of which Michael was sole shareholder and director, took over the property and was funded by the eventual returns from the Kenya investment, which crucially came through just before the formal liquidation of HHL.

Unusually Palmer Birch took legal action not against the insolvent company but against its director Christopher and its funder (and arguably shadow director) Michael personally, alleging that Michael had committed the torts of inducing breach of contract and unlawful interference and that Michael and Christopher had committed the tort of unlawful means conspiracy.  Some of the claims have now succeeded on a preliminary trial of the liability issues, though damages have still to be established.

Importantly for funders, the claim failed that Michael’s failure to fund, which resulted in HHL failing to pay the sums due to Palmer Birch, amounted to his inducing a breach of contract by HHL.  The judge followed earlier cases that “the inducement tort is not committed simply through a suggested failure on the part of the defendant to feed the coffers of a limited liability company, to enable it to meet its contractual obligations, when in fact there is no legal obligation to do so”.  This is known as “mere prevention”, as distinguished from “inducement”.

However this can be a “thin dividing line” and Michael was held to have crossed it in this case by causing HHL “to repudiate the Contract, when the funds which were then made available to CSEL could instead have been made available to HHL in time to enable it to perform the Contract and to meet its contractual obligations”.  On the evidence, Michael was found to have been behind the decision to instruct the solicitors to give notice purportedly to terminate the contract and the insolvency practitioners to arrange the creditors’ voluntary liquidation of HHL, when the last minute funds had become available which he could have used to save the Contract and HHL.  The judge also found that “the evidence safely supports the inference that by no later than late January 2015 Michael and Christopher had reached an agreement to bring about the liquidation of HHL so that it might escape from the Contract and thereby avoid meeting PB's existing and anticipated claims”, which was sufficient for the claim of an unlawful means conspiracy to succeed.

The advice for funders is that yes you can set up such a structure (a claim that the setting up of the structure was itself an unlawful interference or unlawful means conspiracy had been struck out at an earlier hearing as having no prospect of success) and in principle you can withhold further funding that you are under no legal obligation to provide, even if it results in the borrowed failing to meet its contractual obligations and becoming insolvent.  But you have to be careful not to cross that “thin dividing line” and become actively involved in inducing that breach of contractual obligations - especially if you do have the funds that could have been used to comply with them.  If you do set up a structure which is run by a third party, let them get on with it and be very careful not to interfere – especially when it runs into trouble.

The advice for contractors with such companies is to seek personal guarantees from undercapitalised companies.  If they are refused, you proceed at your own risk.  Although Palmer Birch succeeded on liability for some of their claims in this case, they have still to establish quantum, and each case turns on its own facts, which can often be difficult (and expensive) to prove.

“No Oral Modification” – does it mean what it says?

“Boilerplate clauses” are a standard part of most written contracts and are rarely given much thought.  They provide the basic provisions which are considered appropriate in nearly all contracts.  A common one provides that any variation to the agreement must be in writing and signed by or on behalf of the parties.  This is known as a “No Oral Modification” clause, or “NOM”.  Its purpose is to reduce the potential for future disputes where one party seeks to argue that the other had orally agreed to their departing in some way from the terms of the written contract.  This helps create certainty (which is the point of putting contracts in writing), but the problem is that in practice the parties don’t read their contracts (and especially not the boilerplate clauses, which are considered “legalese”) and so do sometimes actually agree such oral variations, which they then proceed to act upon.

Take this example:

“All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

This wording was in a licence to occupy serviced offices in central London granted by MWB Business Exchange Centres Ltd to Rock Advertising Ltd.  Rock fell into arrears and claimed to have agreed a revised payment schedule over the phone with MWB’s credit controller.  The credit controller’s boss didn’t approve the proposed payment schedule, and MWB evicted Rock and claimed the arrears.  Rock counterclaimed for wrongful eviction.  The judge found there was indeed an oral agreement to vary the licence, which the credit controller had authority to conclude, but it was ineffective as it didn’t comply with the NOM.

The case went all the way up to the Supreme Court, as there was no clear authority under English law whether NOM clauses were effective.  The general view, supported by recent cases (and by the Court of Appeal in this case), was that they were not – because the parties had freedom to contract orally and so could agree a subsequent oral contract which would impliedly override the NOM.  But lawyers still included NOMs in contracts – just in case they did work.

The Supreme Court, in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, held 4 to 1 that NOM clauses did indeed work (so we lawyers were right to include them all along).  Lord Sumption, delivering the lead judgment, explained his view that:

“What the parties to such a clause have agreed is not that oral variations are forbidden, but that they will be invalid. The mere fact of agreeing to an oral variation is not therefore a contravention of the clause. It is simply the situation to which the clause applies. It is not difficult to record a variation in writing, except perhaps in cases where the variation is so complex that no sensible businessman would do anything else. The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.”

Lord Briggs disagreed with this analysis, but agreed the appeal should be allowed.  He took the view it was theoretically possible to agree orally to dispense with a NOM clause, but the Courts would only imply that the parties had done so where “strictly necessary”, rather than as a matter of course just because they had not complied with the NOM.  He therefore agreed with the majority that the oral variation was ineffective in this case.

So we now have clear authority that NOMs work, and that you can’t agree to delete them except in writing.  This is good for legal certainty, but is likely to create problems in those cases where the parties have agreed an oral variation anyway and gone ahead and acted upon it.

In such cases, as Lord Sumption pointed out, “the safeguard against injustice lies in the various doctrines of estoppel”; i.e. if something is agreed orally and one party acts in reliance on it to their detriment, the party who allowed this to happen will be “estopped” from relying on the NOM.  You might think this is the same thing as allowing oral variation of NOMs, but the subtle legal difference is that estoppel is an equitable doctrine which allows the Courts to do justice in individual cases rather than a hard and fast rule that a party can always rely on.  So the contract remains as per the written terms, but that doesn’t mean you’ll be able to enforce it if you’ve allowed the other party to believe you agreed you wouldn’t.

Downloaded software is not "Goods"

The Commercial Agents (Council Directive) Regulations 1993 provide for the payment of compensation to a commercial agent whose agency agreement is terminated by the principal without cause, even when terminated under a notice clause in the agreement.  However an important limitation is that they only apply to to agents authorised to negotiate or conclude "the sale or purchase of goods" on behalf of their principal.  Agencies to negotiate the supply of services by the principal are not covered.

So what is the position when an agency for the supply of software is terminated?  Is software "goods" for this purpose?  The Regulations, and the EU Directive which they implemented, do not define "goods".

This question came up in the case of Computer Associates UK Ltd v The Software Incubator Ltd [2018] EWCA Civ 518 decided by the Court of Appeal on 19 March 2018.  In that case Computer Associates had terminated an agency agreement to resell their release automation software, which was supplied by electronic download only, and not on disks, by way of perpetual licence.  The judge held that the Regulations should be interpreted so that "goods" included downloadable software, and that Computer Associates had wrongly terminated the agency, as the agent was not in breach of contract.  He therefore awarded the agent £475,000 in compensation for the loss of its future income stream.

Lady Justice Gloster, delivering the judgment of the Court of Appeal agreed that Computer Associates had not been entitled to terminate the agency, but disagreed that downloadable software was "goods" under the Regulations.  She referred to the earlier St. Albans and Your Response cases, which had made a distinction between software provided on physical disks and software provided by electronic download, and held that only the former constituted "goods".  She noted that the Consumer Rights Act 2015 (which implements the EU Consumer Rights Directive and now governs the sale of goods to consumers - though not to businesses) accepted this distinction as being the existing law and provided for a new category of "digital content" to give consumers equivalent rights for downloaded content to those they had for physical goods.  As the software here was not "goods", the Regulations therefore did not apply, the agent's £475,000 compensation was disallowed, and it was left with the £15,000 the judge had awarded as damages for breach of contract.

This case confirms the orthodox understanding that packaged software sold on physical disks is "goods" but software downloaded from the internet is not.  The reality nowadays is that almost all software is sold by download.  Consumers have the protection of the digital content provisions of the Consumer Rights Act 2015, but those do not apply to businesses, who cannot therefore claim that downloaded software is not of satisfactory quality under the Sale of Goods Act 1979.

In any case, much software is now supplied as a Cloud-based service, especially in a B2B context.  This will definitely not be "goods" when the sale is negotiated by an agent, but is more likely to be considered as a "service" given the way Cloud subscription agreements are typically structured.  The Commercial Agents Regulations will not apply in such cases, but the implied warranty that the supplier has used reasonable skill and care in the provision of the services under the Supply of Goods and Services Act 1982 would apply if not contractually excluded.

Restrictive Covenants - how long and how wide?

This is one of the hardest questions to advise upon when drafting contracts of employment for employer clients (or advising employee clients whether their covenants are enforceable).  It depends what is "reasonable" and cases are of limited use, as each turns on its own facts.  In other words, you have to second guess what a judge might think.

Here's an example:

"13.2. You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date:
[...]
13.2.3 directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period;"

So, a non-compete clause for 6 months and apparently with no territorial limitation.  This is taken from the recent case of Egon Zehnder Ltd v Tillman [2017] EWHC 1278 (Ch) and was for a fairly high-powered executive headhunter in the financial services sector (a former European managing director and COO of JP Morgan before taking a career break).  The reasonableness of restrictive covenants has to be assessed at the date the contract was entered into (rather than when the employee leaves), and here she had started at the most junior "consultant" level (albeit on a guaranteed minimum of £220k p.a.) but eventually left at the most senior "partner" level.  The Group operated worldwide.

On first sight one might think 6 months is fine but no territorial limitation must be unreasonable.  But that's not quite how Mr Justice Mann approached it in the High Court, which shows how difficult these cases can be to advise upon.

The defendant did indeed try to argue the covenant was unenforceable due to its global reach, but didn't get very far.  The judge construed the restriction as only applying to businesses which competed with the businesses of Group Companies with which the employee had been materially concerned (and she had been concerned with some in other countries).  Thus there was "an in-built restriction on the global reach to the clause, deriving from the need for Mrs Tillman to have been involved locally."  This was therefore limited to what was reasonable to protect the Group's business.  Worth bearing in mind when drafting non-compete clauses for clients who say their business is global so they don't want a territorial restriction.  In reality they are unlikely to be operating in every part of the world, and involving the employee in those operations, so this formulation is a neat way of dealing with this.

The defendant also sought to argue that the clause prevented her from holding any shares in a competitor as an investment, and so went beyond what was reasonable to protect the employer's interests.  However there was another clause that expressly allowed shareholdings of up to 5% as an investment whilst still employed, so the Court held that the non-compete clause couldn't have been intended to have that effect after employment.  This shows the current approach of construing the wording to find the presumed intention of the parties, rather than construing any ambiguity against the party seeking to rely on the restrictive covenant.  It is also a reminder it's best to include an express exception for investments of this sort.

On the reasonableness of the 6 months, the discussion centered on how senior this employee really was.  The conclusion was that although she started at the junior consultant grade, she was clearly a high flyer whom the parties expected to move up the ranks (as proved to be the case).  So although her contract had never been updated, she was sufficiently senior that the covenant was enforceable against her. "Six months seems to me to be a reasonable period," said the Judge, "principally to allow the substitution of new relationships with the client and for the fading of confidentiality."  The implication here is that it could be tricky to argue for more than 6 months, even in fairly senior roles - though as ever it all depends on the facts of the particular case.

Textualism and Contextualism

Working out what an ambiguously drafted clause in a contract means (or what a court is most likely to decide it means) is one of the trickier tasks for us lawyers.  The case law provides guidelines on the principles of contractual interpretation, but they do sometimes seem to conflict.

In Rainy Sky SA v Kookmin Bank in 2011 the Supreme Court took the contextualist approach, looking at the factual context and preferring the interpretation most consistent with business common sense. In Arnold v Britton in 2015 (which I blogged about here) the Supreme Court took the textualist approach, preferring the literal interpretation of the words used even if they gave an unjust result to one party.  So have the courts now "rowed back" from contextualism towards textualism?

Not according to the Supreme Court in the latest case on the principles of contractual interpretation, Wood v Capita Insurance Services Ltd.  According to Lord Hodge, "Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement."

Which tool you use depends on the contract.  Sophisticated contracts which have been professionally drafted are more likely to be interpreted textually.  But the court recognised that "negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement".  (This all sounds familiar from my experience of negotiating deals.)  More informal contracts which have been drafted without professional assistance are more likely to be interpreted contextually (perhaps because they may not make sense if taken out of the context and read literally).

Having made all that clear, the Supreme Court in Wood proceeded to uphold the Court of Appeal's literal interpretation of the contract (overruling the first instance judge's more contextual interpretation), but explained that this also made sense in the context.  The clause in question was an indemnity in a share purchase agreement by which Capita acquired a motor insurance broker specialising in classic cars.  It read (my highlighting):

“The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.”

Capita claimed £2.4m under the indemnity re the cost of a remediation scheme required by the FSA (now the FCA) to compensate customers for mis-selling, but the problem was that it had not followed and arose out of complaints by customers but from self-reporting by the company in accordance with regulatory requirements.  On textual analysis of this "opaque" provision the Supreme Court held that it did not cover losses which followed or arose otherwise than out of complaints.  Also looking at the context, it noted that there were wider warranties which did cover the loss (but were subject to a 2 year time limit which Capita had, for some reason, missed) and "It is not contrary to business common sense for the parties to agree wide-ranging warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances."

This last comment is very true, but in my experience indemnities usually focus on particular potential liabilities against which the buyer requires specific protection, and are not (or should not be) dependent on whether the liability arises in a particular way.  This looks more like a case of poor drafting to me.  But, as the court pointed out, it is not their function to improve a bad bargain.

All in all this is a helpful case in explaining how to go about interpreting contracts and what are the tools for the job, and it is good to see the Supreme Court showing such understanding of the realities of negotiating and drafting share purchase agreements.

I'm thinking of having a bumper sticker made for my BMW: "No tools of textual or contextual exegesis are left in this vehicle overnight".

The Dangers of Going Ahead Before Agreeing the Contract

Samuel Goldwyn is famously misquoted as having said that a verbal contract isn't worth the paper it's written on, and there’s much truth in the saying.

Surprisingly often, solicitors are engaged to advise on contract terms but, due to commercial pressures or over-eagerness, the parties go ahead with the work before they’ve agreed all the terms, or they agree the terms but then don’t sign the contract.  The courts will usually find that there is a contract where there has been actual performance, but it won’t be a written one, and so the question arises what are its terms?

In the case of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509 Hyder carried out design works for Buchan, the sub-contractor on two large building projects.  Over 15 years later one of the designs proved to be defective and Buchan claimed £40M of damages from Hyder, who argued that their liability was subject to an agreed cap of £610,515.  The problem was that the parties had never reached agreement on the terms of their contract, but had gone ahead with the work anyway.  There were three competing versions of the terms and conditions, all of which included a cap on Hyder’s liability, but none of which had been agreed.

The judge held that that:

• there was a simple contract between the parties that Hyder would carry out design work and would be paid for that work by Buchan;
• the contract did not include any of the three different sets of proposed terms and conditions; and
• that there was no limitation on Hyder’s liability - despite the fact that every set of proposed terms and conditions included some sort of provision to that effect.

He was critical of Hyder’s unco-operative approach to negotiations and concluded his judgment by saying:

“This case starkly demonstrates the commercial truism that it is usually better for a party to reach a full agreement (which in this case would almost certainly have included some sort of cap on their liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at all.”

Where terms have been agreed but the contract just hasn’t been signed, the court is likely to find that the full unsigned terms apply, so long as the parties have acted consistently with them (at least up to the point the dispute arose).  But where one or both parties have made it clear that they do not agree to a term, the court will not find that they are bound by it just because they have gone ahead with the transaction.  A sneaky negotiator might therefore think there’s scope to dispute the terms you don’t like and to go ahead without signing the contract, on the basis that the remaining terms will apply.  The Arcadis case shows the dangers of this: you could end up with none of the terms applying - including ones in your favour that the other party was prepared to agree.

As a lawyer I always try to achieve certainty for my clients. Unsigned contracts mean uncertainty, with increased risk of a dispute ending up in court, which is always costly even if you win the case at the end of the day.

Why bother with the formalities when you can "Duomatic" it?

I was recently asked to advise on some new Articles of Association a client company proposed to adopt.  When I asked about the Special Resolution of the shareholders to adopt the new Articles, I was told the Directors intended to agree them at their next Board meeting and they thought it was just "a paperwork exercise".  Well it usually is, but I do try to get the paperwork right.  I advised that the necessary resolution should be passed by a 75% majority at a General Meeting convened for the purpose or by circulating a Written Resolution for signature.  However, it turned out that there were only a small number of shareholders, all of whom were on the Board of Directors.  As a recent case illustrates, the "Duomatic principle" would in fact have validated the client’s informal procedure.  So did I really need to bother with the correct, formal advice?

It is a well-established principle of company law that where all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be (Re Duomatic Ltd [1969] 2 Ch 365).  There are a number of cases where amendments to the Articles of companies have been held valid in this way, despite a lack of the formalities prescribed by the Companies Act.

The recent case of Randhawa & Ors v Turpin & Anor [2016] EWHC 2156 (Ch) is a good illustration of just how far the Duomatic principle can go.  75% of the shares in the company were held by the sole Director as nominee for his father, who was disqualified from acting as a director, with the remaining 25% being registered in the name of an Isle of Man company which had been dissolved in 1996.  The sole Director had purported to hold a Board meeting at which he had appointed Administrators.  But the Articles provided that a sole director only had power to convene a general meeting or appoint an additional director.  A creditor (which had taken an assignment of the debt owed to the company’s solicitors) challenged the validity of the appointment of the Administrators.  However this was only after they had lost at a previous hearing seeking to challenge the amount of their fees, when they had not taken this point, so the judge was unsympathetic, saying that at best this smacked of abuse of process.

But he decided the case on the Duomatic principle.  From 2009 to the appointment of the Administrators in 2013 both the disqualified father (who was the beneficial owner of 75% of the shares and in reality in control of the company) and the son (who was sole director and registered holder of the 75% shareholding at the time) had acquiesced in the son exercising the full powers of the Board of Directors.  The father had also acquiesced in the appointment of the Administrators, though not actually present at the meeting appointing them.  This was held to be an effective variation of the Articles under the Duomatic principle to allow the sole Director to appoint the Administrators.  The 25% shareholder did not count because it had been dissolved, and so was unable to exercise its voting rights.

The Duomatic principle can be very useful to cure formal defects in procedure where the reality is that all the shareholders whose formal consent was needed had agreed to the matter.  But to go back to my original question, why bother with the formalities then?

The answer is that you do not want to rely on a Court decision to validate things.  It is always best to get it right first time, so there can be no argument about it.  You would need to prove the shareholders all agreed, and the best way to do this is to get them to pass a resolution in the first place.  If they don’t all agree then you will need to pass the resolution by the requisite majority, because Duomatic requires 100% consent or acquiescence (from those who exist and are entitled to vote at least).

Update: on 1 August 2017 the Court of Appeal allowed an appeal against the decision of the High Court in Randhawa v Turpin, disagreeing that the dissolved 25% shareholder could be ignored.  It remained a member of the company (despite not existing) and could not have given its informal consent when it did not exist.  Which supports my original point, that it is best to get the formalities right in the first place.

Warranties and Representations

It is common in share purchase agreements for the warranty clause (the first draft of which is prepared by the Buyer's solicitors) to use wording such as "The Sellers warrant, represent and undertake that…"  Whilst this may just be a case of lawyers preferring to use three words when one will do, there is often more to the use of such language than meets the eye.

A warranty is a contractual promise that something is so; e.g. that the Company does not have any liability in respect of a particular matter.  If that turns out not to have been so, the Buyer has a claim for breach of contract.  Such claims are subject to carefully-negotiated limitations of the Buyer’s liability under the share purchase agreement; typically a cap of the amount of purchase price received, a minimum threshold for claims, and a time limit for bringing claims of 1 to 3 years (or 6 or 7 years where tax is involved).

A representation is a statement of fact that induces a party to enter into a contract.  If it turns out to have been untrue, the other party may claim damages for misrepresentation.  This is a claim in tort (a legal wrong), not a claim for breach of contract, and the damages are calculated differently.  The limitations of liability in the share purchase agreement are not usually drafted to cover liability for misrepresentation.  This is why buyers’ solicitors try to include the language of representation, and sellers’ solicitors seek to delete it.  Such deletions are usually accepted without serious argument - though private equity investors' solicitors may take a tougher line, and be in a stronger negotiating position.

An undertaking is a contractual promise to do something (or not to do it).  This is completely inappropriate language for the warranties in a share purchase agreement, and is either bad drafting or a cunning attempt to hide the word "represent” amongst some apparent bad drafting.

Acting for the Seller, one therefore always seeks to avoid the language of representation, and to include the usual boilerplate "entire agreement" clause to the effect that this is the entire agreement between the parties, it supersedes all prior negotiations, and the Buyer acknowledges it is not relying on any previous representations.  This language is intended to exclude liability for misrepresentation, and with an express exception for liability for fraudulent misrepresentation is generally considered to be reasonable if negotiated at arms’ length between commercial parties with the benefit of legal advice (This is important because under the Misrepresentation Act 1967 liability for misrepresentation can only legally be excluded to the extent the exclusion is reasonable.)

In the case of Idemitsu Kosan Co Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) (27 July 2016), Idemitsu were out of time for bringing a contractual claim for breach of warranty under a share purchase agreement (the agreed 18 month time limit for non-tax warranty claims having expired without a claim having been made), so they sought to get round this by bringing a claim for misrepresentation under s.2(1) of the Misrepresentation Act 1967.  Sumitomo responded with an application under CPR Part 24 for summary judgment dismissing that claim, on the basis that it had no real prospect of success and there was no other compelling reason why it should be disposed of at a trial.

Such cases always depend on the wording of the agreement, and Idemitsu were in some difficulty there, as the relevant clauses only used the language of warranties.  The word "representation" only appeared in the entire agreement clause, apparently intended to exclude them.  However there were conflicting previous cases on the point: in one Arnold J. had decided that warranties could of themselves amount to representations, and in another Mann J. had decided that they could not.  Both are eminent judges.  Idemitsu’s Counsel also ran a clever argument that by putting forward the agreement with the warranties for execution, Sumitomo had made representations inducing Idemitsu to enter into the agreement.  The target Company had interests in North Sea oil and gas fields, had been sold for US$575M, and Idemitsu was seeking to recover a claimed loss of US$105.9M (as against a contractual cap on warranty claims of US$1,5M) relating to liability for sharing the operating expenses of a floating production storage and offshore loading vessel.  So it must have seemed worth a try.

Andrew Baker QC sitting as a judge of the High Court was unconvinced by Idemitsu’s Counsel’s arguments, and preferred the reasoning of Mann J. from the previous cases.  He held that a warranty is (without further language) a contractual promise: nothing less, but nothing more.  He upheld the entire agreement clause as effective to exclude misrepresentations, of which there were none.  He therefore gave judgment for the defendant.

The case is welcome confirmation that my deletions of representation wording when acting for sellers were not in vain, and should be of comfort to sellers that their limitations on liability do mean what they thought they did.  However, given the amount at stake and the conflicting first-instance decisions, it may still go to the Court of Appeal.

Can discrimination claims be an abuse of rights?

In the case of Nils-Johannes Kratzer v R+V Allgemeine Versicherung AG the Court of Justice of the European Union had to decide whether a person who was clearly not seeking employment, but merely the status of applicant in order to bring claims for compensation, was qualified to bring such claims under the EU Directives on age and sex discrimination.  Was this an abuse of rights under EU law?’

In March 2009 R+V advertised trainee positions for graduates in the fields of economics, mathematical economics, business informatics and law.  Mr Kratzer applied for a legal trainee position, emphasising that he fulfilled all the requirements in the advertisement and his experience as a lawyer and former manager with an insurance company.  When his application was rejected, Mr Kratzer responded with a written complaint demanding compensation of EUR 14,000 for age discrimination.

R+V invited Mr Kratzer to an interview with its head of HR, stating that the rejection of his application had been automatically generated and was not in line with its intentions.  But Mr Kratzer declined the invitation and suggested a discussion of his future with R+V once his compensation claim had been satisfied.

He then brought an action for the EUR 14,000 for age discrimination before the Wiesbaden Labour Court in Germany, and on finding out that R+V had awarded the four trainee posts to women only, although the 60+ applicants were divided almost equally between men and women, he increased his claim by EUR 3,500 for sex discrimination.

The Wiesbaden Labour Court dismissed the action, and the Hesse Regional Labour Court dismissed his appeal.  He appealed again to the German Federal Labour Court, which referred the above questions to the CJEU for a ruling.  The CJEU delivered its judgment on 28 July 2016 - over 7 years after the dispute first arose.

Unsurprisingly, the CJEU gave Mr Kratzer’s claims short shrift.  Dispensing with the usual Advocate General’s Opinion and looking at the underlying purpose of the Directives to ensure equal treatment of persons seeking employment, they held that “a situation in which a person who in making an application for a post does not seek to obtain that post but seeks only the formal status of applicant with the sole purpose of seeking compensation does not fall within the definition of ‘access to employment, to self-employment or to occupation’, within the meaning of those provisions, and may, if the requisite conditions under EU law are met, be considered to be an abuse of rights”.  They left the decision on costs of the case to the referring court, which one suspects is unlikely to rule in favour of Mr Kratzer if he has been abusing his rights.

Courts are never going to be sympathetic to claimants who are merely seeking compensation without having suffered a genuine loss.  Mr Kratzer’s mistake would appear to have been making payment of the compensation a precondition to the job interview.  If he was genuinely interested in the job, he should have reserved his rights and gone ahead with the application.  R+V would then have had the opportunity (if well-advised) to carry out a scrupulously fair and documented selection process for all the applicants, which could have been used in defence of his claim if he was ultimately rejected.

The case is of some comfort to companies who receive speculative discrimination claims for job applicants - though they would do well to note R+V’s careful initial response.

No Snoopers' Charter for Employers

The case of Barbulescu v Romania, in which the European Court of Human Rights gave judgment on 12 January 2016, was widely claimed in the press to have given the green light to employers to monitor their employees' emails for personal use.  It is true that the employer's monitoring of the employee's emails was upheld by the ECHR in that case, but the facts were somewhat unusual and the actual decision was more nuanced.

Mr Barbelescu worked for a company in Bucharest as an engineer in charge of sales.  His employer asked him to create a Yahoo Messenger account for responding to clients' enquiries.  The company had a policy that "It is strictly forbidden to disturb order and discipline within the company’s premises and especially ... to use computers, photocopiers, telephones, telex and fax machines for personal purposes."  When the employer informed Mr Barbulescu that it had monitored his Yahoo Messenger communications over the course of a week and that it considered he had used the account for personal purposes in contravention of this policy, he replied in writing that he had only used it for professional purposes. The employer responded with a 45 page transcript of his Messenger communications for that week, including messages with his brother and his fiancee that contained intimate personal information about his health and sex life. The employer disciplined Mr Barbulescu and dismissed him for unauthorised personal use of the internet.

The ECHR held by a majority that Mr Barbelescu's right to privacy for his correspondence under Article 8 had been engaged, but that the interference had been proportionate within the State's margin of appreciation.  Previous cases that had gone the other way were distinguished on the basis that in those cases the employer had tolerated some personal use of the internet.  The Romanian courts in this case had considered it important  that the employer accessed the Yahoo Messenger account in the belief that it contained only professional communications (as the employee had claimed). It was not unreasonable for an employer to want to verify that employees are working during working hours.  The monitoring was limited in scope and therefore proportionate.

Whilst the Barbeslescu case is an example of an employer's monitoring of an employee's emails being upheld, it actually held that the right to privacy applies, and the monitoring was only justified on the basis of the strict policy forbidding personal use and the employee's specific denial of any breach of that policy.  Most employers in the UK do allow some personal use of work computers and telephones, and in such cases a clear policy that they will be monitored to check there is no abuse needs to be clearly communicated to employees and any such monitoring needs to be proportionate.

The Information Commissioner's Employment Practices Code provides some useful guidance to employers on monitoring communications in Part 3.

No safe harbour in the US

As has been widely reported, on 6 October 2015 the Court of Justice of the European Union gave judgment in the case of Maximillian Schrems v the Data Protection Commissioner for Ireland, holding that the European Commission Decision creating the "safe harbour" for the transfer of personal data from the EU to the US was invalid.

European data protection law prohibits the transfer of personal law outside the EU except to a country which "ensures an adequate level of protection" for personal data or where certain exceptions apply - for example where the data subject has given "unambiguous consent" to the transfer, or where "binding corporate rules" have been agreed to provide a contractual means of protection.  There is a very limited list of countries which have been found by the EU to ensure an adequate level of protection.  But, crucially, by Commission Decision 2000/520/EC of 26 July 2000 it included the EU/US "safe harbour" agreement, with which US companies could self-certify their compliance.  The US safe harbour was of vital importance to the large number of international businesses which transfer customer data to their US operations, and with the growing importance of the Cloud even companies with no US operations are increasingly storing data on servers which are physically located in the US - and have therefore been relying on their Cloud service providers' confirmation that they are signed up to the safe harbour.  (Or at least they should have been relying on it if they had properly addressed their minds to the issue.)

All this was thrown into doubt when Edward Snowden revealed that the US intelligence agencies, and in particular the NSA, carried out widespread and indiscriminate surveillance of data stored by US companies.  We now know that US companies have to give access to their data to the NSA, and so are unable to guarantee the necessary adequate level of protection for their personal data to persons in the EU, as the surveillance is carried out on an indiscriminate basis, rather than a proportionate basis where necessary for national security purposes - such as to combat terrorism.

Mr Schrems (who is an Austrian citizen) therefore brought a case requiring the Irish Data Protection Commissioner to prohibit Facebook Ireland (which held his personal data on Facebook) from transferring that data to servers operated by Facebook Inc in the US for processing.  The Irish High Court considered it was bound by Commission Decision 2000/520/EC on the safe harbour, but had its doubts as to the validity of the decision in the light of the Snowden revelations, so referred to the CJEU the question whether it was bound to follow the safe harbour Decision.

The CJEU held that it was not, and that national data protection authorities are not prevented by Commission Decisions from carrying out their own assessment.  However, the Court went on to take the opportunity to hold (despite not having been expressly asked to do so by the Irish court) that Decision 2000/520/EC is invalid - particularly in the light of subsequent revelations.

So where does this leave the many companies that have been relying on the safe harbour to transfer customer data to their US operations, or just to store it in the Cloud?  They cannot just wait and see what happens when the case goes back to the Irish court to decide in the light of the CJEU's guidance, as the CJEU has already held the safe harbour invalid.  Nor can they wait for the EU and US to conclude their current negotiations for an amended safe harbour, as that will take some time and they need to continue transferring personal data.  Binding corporate rules or standard contractual clauses in the form approved by the EU should be an option, but it is difficult to see how a US company could comply with any contractual data protection obligations it might undertake, given it would be bound to give the NSA access to its data.  There is a limited exception where "the transfer is necessary for the performance of a contract between the data subject and the controller", which might arguably be used to perform existing contracts with customers.  But for the moment, the only viable option seems to be to obtain the unambiguous consent of customers to transferring their data to the US by an express opt-in, warning them of the risk of surveillance by the NSA (in case anybody isn't already aware of this, or doesn't appreciate that it could happen in this case).  Realistically this would involve stopping providing the service to the customer unless they click to confirm their opt-in to a clear warning message.

The alternative is to find a non-US Cloud service provider with servers in the EU or a country which is still considered to offer adequate protection; the list being Andorra, Argentina, Canada, Faeroe Islands, Guernsey, Israel, Isle of Man, Jersey, New Zealand, Switzerland and Uruguay.

Companies can be discriminated against

In the recent case of EAD Solicitors LLP and others v Abrams, the Employment Appeal Tribunal has held that it is possible for a limited company to bring a claim of direct discrimination on the ground of age under section 13 of the Equality Act 2010.

Like many of the cases on age discrimination, the claim was against a firm of solicitors who sought to compulsorily retire a partner when he reached the retirement age in their Partnership Deed (nowadays an LLP Membership Agreement).  The twist here was that the partners were (for tax reasons) supplying their services to the firm (which was a Limited Liability Partnership) through personal service companies.  The member of the LLP that brought the claim of age discrimination was therefore the individual partner's personal service company, rather than the partner himself.

So how can you discriminate against a company on grounds of age?  The company itself was actually very young, having been incorporated only as the partner approached retirement, but it was allegedly being discriminated against on grounds of old age.

The answer is that the formulation of the test for direct discrimination in section 13 is:

"A person (A) discriminates against another (B) if, because of a protected characteristic, A treats B less favourably than A treats or would treat others."

The discrimination therefore just has to be "because of a protected characteristic" (in this case age).  Person B does not himself (or itself) have to have that characteristic.  This is what is known as "associative discrimination", where person B is discriminated against because he (or it) is associated with someone having the protected characteristic.  This is a well-established principle, which has been applied for example in cases where someone is dismissed from their job because they are caring for a disabled person or where they are disciplined for refusing to obey instructions to discriminate against customers on racist grounds.  The point which was decided in this case was that "person B" does not have to be a natural person, but can be a legal person such as a company.

Other forms of discrimination against companies are therefore possible.  The judge gave hypothetical examples of "a company being shunned commercially because it is seen to employ a Jewish or ethnic workforce; a company that loses a contract or suffers a detriment because of pursing an avowedly Roman Catholic ethic; one that suffered treatment because of its financial support for the Conservative Party or, say, for Islamic education; or one that was deliberately not favoured because it offered employment opportunities to those who had specific disabilities that were unattractive to some would-be contractors or because, let us suppose, of the openly gay stance of a chief executive."

The case only decided the claim could proceed as a preliminary point.  Whether this company was actually discriminated against, or whether the discrimination could be justified as a proportionate means of achieving a legitimate end (the usual way to retire older partners) remains to be decided.  It will also be interesting to see what damages can be claimed.  The company has clearly suffered loss of profits, but can it claim for injury to the feelings of its director?

Supreme Court Confirms Document Means What It Says

I have to say it makes a refreshing change to read a report of a case where the court upholds an unjust result.  Judges quite rightly seek to do justice in the cases that come before them when it is open to them to do so, but sometimes the principles of freedom of contract and commercial certainty mean that when a party has made a bad bargain, he will be held to it.

That was what happened in Arnold v Britton & others [2015] UKSC 36.  91 long leases were granted of chalets in a holiday park on the Gower Peninsula in South Wales, 25 of which contained a service charge provision in the following terms (with minor variations):

"To pay to the Lessor without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year or part thereof."

21 of such leases were granted between 1977 and 1991.  The other 70 leases had been granted between 1974 and 1977 and provided for the service charge to increase by 10% every 3 years rather than every 1 year.  4 of those 70 were then varied between 1988 and 2002 to provide for the yearly rather than 3 yearly increases.  Because of the compounding effect of the wording over the 99 year term of the leases, by expiry of all the leases in 2072 those with yearly increases would be paying over £550,000 per year by way of service charge, whilst those with 3 yearly increases would be paying about £1,900 per year.

The Lessees with the leases providing for yearly service charge increases therefore sought to challenge the service charge clause in the courts.  The County Court judge decided in their favour, interpreting the clause as meaning they had to pay a "proportionate part" of the costs to the Lessor, capped by the formula in the second part of the clause.  On appeal, the High Court judge, the Court of Appeal and the Supreme Court (by a 4 to 1 majority) all decided that the meaning of the clause was clear: that the Lessees had to pay a fixed service charge of £90 compounding by 10% yearly.  Only Lord Carnwarth in the Supreme Court disagreed, preferring the County Court judge's interpretation.

Lord Neuberger, giving the leading judgement in the Supreme Court, was clear that where the natural meaning of the words used by the parties was clear, there was no room for the court to depart from them by reference to principles such as commercial common sense: "while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party."

He also pointed out that the purpose of a fixed service charge clause was to provide certainty and avoid arguments over the lessor's actual expenditure and its reasonableness, and that inflation had been running at well over 10% per annum between 1974 and 1981, and over 15% per annum for six of those eight years; although it was less than 10% per annum after 1981.  In other words, although it was ill-advised for the then lessees to have entered into leases in such terms, it was understandable in the circumstances of the time.

The Lessor had also (perhaps wisely) indicated that she was prepared to renegotiate the 25 leases to a formula linked to the Consumer Price Inflation index, so a just result may ultimately be achieved.

It is good to be able to advise clients that the clear words of their contracts will be enforced by the courts if necessary.  The tricky bit, of course, is knowing when the words are clear.  8 out of 10 learned judges thought they were perfectly clear in this case, but 2 thought they were sufficiently unclear to permit an alternative interpretation.  Does that mean they were only 80% clear?

"Parking Charge" not a Penalty

Most motorists are no doubt outraged by the high charges car park operators make if you have overstayed your parking time, even by a minute.  Nowadays these charges are enforced by cameras with automatic number plate recognition, so are not easily avoided.  But can you challenge them if the car park operator takes you to court?

We now have a case on the subject.  In Parkingeye Ltd v Beavis [2015] EWCA Civ 402 the Court of Appeal considered an appeal by Mr. Beavis against a “Parking Charge” of £85 made by Parking Eye when he overstayed the 2 hours permitted period of free parking in the car park at the Riverside Retail Park in Chelmsford by nearly an hour.  About 20 signs were prominently displayed at the car park.  According to the judgment “The signs are worded as follows (the words I have underlined being especially large and prominent, and the words I have italicised being in small print but still legible if one wished to read them)

Parking Eye car park management

2 hour max stay

. . .

Failure to comply . . . will result in Parking Charge of £85

. . .

Parking Eye Ltd is solely engaged to provide a traffic space maximisation scheme. We are not responsible for the car park surface, other motor vehicles, damage or loss to or from motor vehicles or user's safety. The parking regulations for this car park apply 24 hours a day, all year round, irrespective of the site opening hours. Parking is at the absolute discretion of the site. By parking within the car park, motorists agree to comply with the car park regulations. Should a motorist fail to comply with the car park regulations, the motorist accepts that they are liable to pay a Parking Charge and that their name and address will be requested from the DVLA.

Parking charge Information: A reduction of the Parking Charge is available for a period, as detailed in the Parking Charge Notice. The reduced amount payable will not exceed £75, and the overall amount will not exceed £150 prior to any court action, after which additional costs will be incurred.

This car park is private property."

It was not disputed that the signs were reasonably large, prominent and legible, so that any reasonable user of the car park would be aware of their existence and nature and would have a fair opportunity to read them if they wished, nor that this gave rise to a contract between Mr. Beavis and Parking Eye.

Mr. Beavis challenged the £85 parking charge as being:

1. unenforceable as a penalty at common law; and
2. unfair and therefore unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations 1999.

He lost before the judge at first instance, and obviously felt strongly enough about the issue to appeal to the Court of Appeal.  The Consumers’ Association intervened in the case, so must also have felt the issues were of importance to consumers.

At first sight, one would have thought this was obviously a penalty, as it was not a genuine pre-estimate of Parking Eye’s loss (they being simply contracted to manage the free parking facility for the benefit of shoppers) and was clearly intended as a deterrent.  However, the Court of Appeal reviewed the case law on the subject, culminating in the recent case of El Madkessi (which is still under appeal to the Supreme Court) and noted that “The modern approach to penalty clauses suggested that a clause might not be a penalty, even though it did not contain a genuine pre-estimate of loss, if its dominant purpose was not to deter breach and the fact that there was a good commercial justification for it might lead to the conclusion that that was not the case. The clause would be a penalty only if the sum stipulated was extravagant and unconscionable.”

Here the provision of a 2 hour free parking facility for the benefit of shoppers and the need to keep the car park from becoming full, the fact that the charge needed to be sufficient to cover the costs of enforcement and was in line with the charges made by local authorities all amounted to commercial justification.  The Protection of Freedoms Act 2012 also allowed the recovery of parking charges of this nature that had clearly been brought to the attention of motorists.  In these circumstances £85 was not considered extravagant and unconscionable by the Court, and the charge was therefore held not to be a penalty.

The list of potentially unfair terms in the 1999 Regulations includes “terms which have the effect of requiring a consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation”. The parking charge would have been unfair if Parking Eye had “acted contrary to the requirements of good faith” in imposing it and if “that term caused a significant imbalance in the parties' rights and obligations under the contract to the detriment of the motorist”.  Given that the signs were prominently displayed, the Court held there was no lack of good faith, and the same factors as led to the clause not being a penalty were sufficient for there to be no such significant imbalance.

Mr. Beavis therefore had to pay his £85 parking charge, plus presumably rather more in legal fees.  It would only have cost him £50 if he had taken advantage of the discount for prompt payment.

So we now know that a “parking charge” of about £85 is likely to be recoverable, at least if the notices drawing it to motorists’ attention are sufficiently prominent and clearly worded.  Presumably there must come a point at which such a charge is so clearly in excess of the industry norm (as charged by local authorities and others, and which no doubt will increase over time) as to be “extravagant and unconscionable” but we do not yet know what that point would be and it would take a brave (or really outraged) motorist to test it again before the courts.

Update: on 4 November 2015 the Supreme Court gave judgment in the joined appeals in Cavendish v El Makdessi and ParkingEye v Beavis, deciding that the clauses in both cases were not penalties, and therefore allowing the appeal in the former and dismissing Mr. Beavis' appeal against the Court of Appeal decision discussed above.