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EDPB Guidelines on controllers and processors

21/09/20 – On 2 September 2020, the European Data Protection Board (EDPB) adopted ‘Guidelines 07/2020 on the concepts of controller and processor in the GDPR’. The Guidelines deal with the principles underpinning the differences between controllers and processors, and also delve into the more esoteric world of joint controllers. (more…)

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Demise of the EU-U.S. Privacy Shield

23/07/20 – If you, as a ‘data exporter’, want to transfer personal data to a country outside the EEA (and which is not one of the 12 countries that have been granted an adequacy decision by the European Commission), then you need to use one of the GDPR-approved ‘transfer mechanisms’. (more…)

Tags: data protection, essentially equivalent, FISA, gdpr, privacy shield, SCCs, tia, transfer impact assessment
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The P2B Regulation – regulating the e-commerce gatekeepers

13/07/20 – The EU Platform to Business Regulation (the ‘P2B Regulation’) came into effect on 12 July 2020. The P2B Regulation applies to all online platforms and search engines which provide services to business users in the EU, where those business users offer goods or services to consumers in the EU. (more…)

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Government’s response to the Law Commission’s report on Electronic execution of documents

12/03/20 – The UK government has issued a Statement in response to the Law Commission’s report on Electronic execution of documents. My article on the Law Commission’s report can be accessed here.

Key takeaways from the government’s Statement:

The government agrees with the report’s conclusion that businesses and individuals can feel confident in using e-signatures in without the need for primary legislation.
The government accepts the report’s recommendation that an Industry Working Group should be established to consider, in particular, the security and technology of electronic signatures.
The Industry Working Group will also be asked to consider the question of video witnessing of electronic signatures.
In accordance with the report’s recommendation, the government will ask the Law Commission to undertake a broader review of the law of deeds. The timing for the review will however be subject to government and Law Commission priorities given the existing volume of law reform work.

Tags: deeds, electronic signature, execution of documents, law commission, video witnessing
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AA v Persons Unknown – recovering Bitcoin ransom payments

10/02/20 – In AA v Persons Unknown [2019], the Commercial Court confirmed that cryptoassets such as Bitcoin can constitute property under English law, and are therefore capable of being subject to a proprietary injunction (i.e. a court order which prevents the defendant from dealing with the relevant property).

The judgment refers extensively, and gives considerable weight, to the UK Jurisdiction Taskforce’s recent Legal Statement on the Status of Cryptoassets and Smart Contracts – see my article on the UKJT Statement here.

Background

In October 2019, one or more hackers encrypted the IT systems of a Canadian insurance company with malware. In order to regain control of its IT systems, the insurance company paid the hacker(s) a ransom of 109.25 Bitcoins (approx. $950,000).

The insurance company’s cybercrime insurer traced the ransom payment to a Bitcoin wallet linked to and controlled by Bitfinex, a crypto exchange operated by two British Virgin Island entities. The insurer applied for a proprietary injunction to recover the 96 Bitcoins that remained in the wallet.

Judgement

Because proprietary injunctions can only be granted over property, the Commercial Court first had to consider whether Bitcoin constitutes a form of property. Although Bitcoin do not fit into either of the two conventional categories of property – ‘choses in possession’ or ‘choses in action’ – the Court reviewed the analysis of the proprietary status of cryptoassets in the UKJT Statement, and in particular the UKJT’s conclusion that, despite their “novel or distinctive features“, cryptoassets may be objects of property rights, and “[i]f it is necessary to classify it at all, then a cryptoasset is best treated as being another, third kind of property” (UKJT Statement, para. 86(a)). The Court agreed with this approach, adding that “it is fallacious to proceed on the basis that the English law of property recognises no forms of property other than choses in possession and choses in action“.

Having confirmed that Bitcoin constitutes property, the Court granted the proprietary injunction.

Tags: Bitcoin, blockchain, cryptoassets, cryptocurrencies, distributed ledger technology, DLT
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UKJT’s Legal Statement on the Status of Cryptoassets and Smart Contracts

04/12/19 – Prompted by a perceived need to provide legal certainty and market confidence in distributed ledger technology (DLT) and smart contracts, the UK Jurisdiction Taskforce (part of the LawTech Delivery Panel) published a Legal Statement on the Status of Cryptoassets and Smart Contracts on 18 November 2019. The Statement follows on from a consultation launched on 9 May 2019.

Cryptoassets

In relation to cryptoassets, the UKJT’s main conclusions are:

Cryptoassets should be treated in principle as property under English law because:
- cryptoassets have all the key characteristics of property – “… definable, identifiable by third parties, capable in its nature of assumption by third parties, and […] some degree of permanence or stability” (para. 39), and
- none of the distinctive features of cryptoassets – such as intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation and rule by consensus – disqualify cryptoassets from being property.
Cryptoassets’ status as property has important consequences in a number of areas, including succession on death, insolvency, fraud, theft and breach of trust.
As with other intangible assets, title to cryptoassets can be vested or transferred by assignment or agreement of its owner. The Statement suggests that an ‘on-chain’ assignment (i.e. a transfer of the cryptoasset itself) is best analysed by way of the creation of a new cryptoasset owned by the transferee, with the ‘old’ cryptoasset ceasing to have any value or function because it is treated by the consensus as having been spent or cancelled (and as a result any further dealings in it would be rejected).
It is also possible to transfer a cryptoasset ‘off-chain’, where the cryptoassets represents or is linked to a conventional asset, such as money, land or a contractual debt. An off-chain transaction would however allow the transferor to retain a copy of the private key, and therefore expose the transferee to the risk of ‘double-spending’ by the transferor.
A distributed ledger (such as a blockchain) operates as a “reliable record in practice of which person, or which address-identifier, has control of a cryptoasset, because only dealings in a cryptoasset that are both consistent with the transaction history recorded in the ledger and signed with the relevant private key will be accepted as valid” (para. 131). But unless and until it is given binding legal effect by statute, the distributed ledger does not constitute a definitive record of legal rights in the way that the records held by the Land Registry or the Intellectual Property Office do.
Although cryptoassets are not documents of title, documentary intangibles or negotiable instruments, some types of security can be granted over them, including mortgages and equitable charges. Because a cryptoasset cannot be physically possessed, you cannot create a lien over it, or sue someone for conversion of it (wrongfully dealing with it). For the same reason, a cryptoasset cannot be the object of a bailment.

Smart contracts

In relation to smart contracts, the UKJT’s main conclusions are:

Whether the contractual obligations under the smart contract are defined by computer code, or the code is implementing an agreement whose meaning is to be found elsewhere, English law is able to identify, interpret and enforce smart contracts using ordinary and well-established legal principles.
English law is also able to deal with smart contracts formed between anonymous or pseudonymous parties, and can also deal with bilateral smart contracts as well as those structured around Decentralised Autonomous Organisations (DAOs).
A statutory “signature” requirement can, in principle, be met by using a private key which authenticates a document, and a statutory “in writing” requirement can be met in the case of a smart contract whose code element is recorded in source code.

Final comments

In addition to the conclusions mentioned above, the Statement provides a comprehensive, useful description of the key technical and operational characteristics of both cryptoassets and smart contracts.

Tags: blockchain, contract, cryptoasset, distributed ledger technology, DLT, smart contract, token
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CMA alleges resale price maintenance by guitar firm Fender

22/10/19 – The Competition and Markets Authority (CMA) has made a provisional finding that Fender Musical Instruments Europe Limited operated a policy between 2013 and 2018 which required online retailers to resell Fender’s guitars at or above a minimum price. This practice constitutes illegal resale price maintenance (RPM) under:

The Chapter I prohibition of the Competition Act 1998, covering anti-competitive agreements, concerted practices and decisions by associations of undertakings which have as their object or effect the prevention, restriction or distortion of competition within the UK or a part of it and which may affect trade within the UK or a part of it.
Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits anti-competitive agreements, concerted practices and decisions by associations of undertakings which may affect trade between EU member states.

The CMA’s findings are provisional, and no final decision will be made as to whether there has been a breach of competition law until the CMA has considered any representations from Fender.

In August 2019 the CMA issued a £3.7 million fine to Casio for illegal RPM in relation to online sales of digital keyboards and pianos.

Tags: competition law, resale price maintenance, reseller agreement, RPM, RRP
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Law Commission’s report on Electronic execution of documents

25/09/19 – Following a project focusing on uncertainties regarding the formalities around the electronic execution of documents, the Law Commission issued its report on Electronic execution of documents on 6th September 2019.

Key takeaways:

Electronic signatures can be used to execute documents, including where there is a statutory requirement for a signature.
An electronic signature is capable in law of being used to execute a document (including a deed), as long as the signatory intends to authenticate the document and any relevant formalities, such as witnessing, are satisfied.
English courts have traditionally been flexible in recognising different form forms of signature, including electronic signatures such as a name typed at the bottom of an email, or the ticking of an “I accept” box on a website.
The approach of the UK courts is consistent with the EU eIDAS Regulation (EU/910/2014), which states that an electronic signature cannot be denied legal validity because it is electronic.
There is uncertainty whether deeds can be witnessed remotely via video witnessing. The Law Commission’s view is that it is not currently legally permitted.

The Law Commission’s recommendations include:

Establish an industry working group to consider practical and technical issues around electronic signatures, and provide best practice guidance for their use in different types of transactions.
Industry working group to review video witnessing of deeds, and government to consider appropriate legislative reform.
Review the law of deeds, and consider whether deeds remain fit for purpose (whether executed on paper or electronically).
Government to consider codifying the law on electronic signatures to improve the accessibility of the law.

Tags: deeds, electronic signature, execution of documents, law commission, video witnessing
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Legal know-how: “subject to contract”

The phrase “subject to contract” should be used when you are negotiating what you expect may in the future become a binding contract, but not yet. So when negotiating a letter of intent or heads of terms, it is a useful way of making it clear that, although the key terms of the transaction are being put in writing, you don’t intend to be legally bound unless and until those terms are then confirmed in a more formal, detailed agreement. And anyone who has bought or sold a house in the UK will be familiar with offers being “subject to contract” (or “STC”), making it clear that, although an offer to purchase a property may have been accepted by the seller, there is no commitment to proceed with the transaction until the parties exchange contracts.

So far, so straightforward. But it should be borne in mind that using the “subject to contract” phrase is not conclusive, but creates a presumption that the parties do not intend to create legal relations (ie enter into a binding contract), and that the behaviour of the parties may result in the protection offered by the “subject to contract” to be lost. So, for example, in the case of RTS Flexible Systems Ltd v Molkerei Alois Müller¹, Müller had sent a letter of intent to RTS, together with a draft contract which included a clause limiting RTS’s liability in the case of certain disputes. The draft contract also included a clause stating that the contract would not be binding unless it was signed and executed by the parties, ie that it was subject to contract. The contract was never signed, but RTS proceeded with its supply obligations with the consent of Müller. A dispute arose which included a claim by Müller against RTS for failing to supply equipment of the correct specification. Müller argued that the draft contract (with the clause limiting RTS’s liability) did not apply since the draft included the clause confirming that it was not binding unless signed and executed. The Supreme Court disagreed, and decided that the parties had proceeded with the project as if the draft contract did apply, and they had therefore, by their conduct, waived the clause in the contract that stated it would not take effect unless signed.

So to summarise:

If you want to avoid the risk of finding that a binding contract has been formed during negotiations, make it clear at the outset that the discussions are subject to a formal, detailed agreement being signed, label your emails and any draft documentation with “subject to contract”, and confirm the “subject to contract” nature of the discussions prior to the start of any meetings or phone calls.
And if you decide to start work before the formal contract is signed, then you need to make it crystal clear that the contract negotiations remain “subject to contract”, so as to avoid a court inferring that the subject to contract understanding had been waived by agreement as a result of the parties’ conduct and communications.

Note 1: RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC

Tags: subject to contract
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Best and reasonable endeavours

If you are involved in negotiating commercial agreements, you are likely to have come across situations where either you or the other side is unwilling to agree to an absolute obligation (eg “the Distributor shall achieve sales of the Software of at least £1 million in the first 12 months….”), but agrees to use its “reasonable endeavours”, or even “best endeavours”, to do so. And, in our example, it may only be if and when the £1 million sales target is not reached that the parties consider what the words “reasonable endeavours” or “best endeavours” actually mean.

Disputes as to the meaning of “reasonable endeavours” and “best endeavours” (as well as their numerous variants, eg “all reasonable endeavours”, “commercially reasonable endeavours” etc) have ended up in the courts with perhaps unsurprising frequency. But because each of the court cases turns on its facts, and in particular the specific obligation which is the subject of the reasonable/best endeavours qualification, there are no one-size-fits-all definitions.

The best we can do (no pun intended) is to look for some general principles from the cases, and then to consider how we can apply those principles to at least reduce the risk of the endeavours obligations in our agreements ending up in court.

Some guidance from the courts….

Back in 1980 the Court of Appeal said that a best endeavours obligation required the contracting party “to take all those steps in their power which are capable of producing the desired results … being steps which a prudent, determined and reasonable [person], acting in his own interests and desiring to achieve that result, would take” [1].
Then in 2007 a court suggested that a key difference between “reasonable” endeavours and “best” endeavours is that a reasonable endeavours obligation does not require a party to sacrifice its own commercial interests” [2], whereas, by extension, a best endeavours obligation may require a party to do so.
The principle of a party having to sacrifice its own commercial interests was illustrated in the Jet2.com v Blackpool Airport case last year [3]. The agreement between the operator of Blackpool Airport (BAL) and the low cost airline Jet2.com included a provision that BAL would use its best endeavours “to promote Jet’s low cost services”. The Court of Appeal decided that BAL was obliged to continue to operate the airport outside BAL’s standard opening hours for Jet2.com flights even if this resulted in BAL running at a loss.
But a best endeavours obligation is not absolute, and does allow the relevant party to have some regard for its own commercial interests; in the words on one judge a best endeavours obligation would not require action resulting in “the certain ruin of the Company or … the utter disregard for the interests of shareholders” [4].
In contrast to best endeavours, a court has held that a reasonable endeavours obligation entitles the relevant contracting party to balance the obligation against all relevant commercial considerations, ie where the party has a number of courses of action available to it, the party need not pursue a course of action which would lead to commercial disadvantage. (The exception to this is where the agreement provides for the specific measures that the party needs to take, in which case the obligation to take those measures, or at least to try to do so, will prevail irrespective of any commercial disadvantages).
Although “all reasonable endeavours” is often used as a halfway-house or compromise between “reasonable endeavours” and “best endeavours”, the courts have suggested that it should be considered to be more akin to a “best endeavours” obligation. In one case in 2008 it was decided that “all reasonable endeavours” was in fact equivalent to “best endeavours” [5].

…and putting them into practice

Work on the basis that an endeavours obligation (whether “best”, “reasonable”, or “all reasonable”) will always be subject to differences of opinion – one party’s opinion as to what is reasonable, or even possible, may not be shared by the other party.
Keep in mind that a best endeavours obligation (and in many situations, an all endeavours obligation) may require the relevant party to sacrifice its own commercial interests in order to satisfy its endeavours obligation. If this is not acceptable to the party, qualify the best endeavours obligation with appropriate language, eg “use all reasonable, but commercially prudent, endeavours”.
Agree what actual steps are required in order to satisfy the endeavours obligation (and/or what steps are not required to be taken), and when those steps should be taken. Using our distributor sales target example, try to agree what the distributor needs to do as part of their endeavours obligation, eg employ a specific number of sales staff during a specific period, spend a minimum amount on advertising/online marketing, attend specific conferences/marketing events etc.
Where the endeavours obligation will, or is likely to, require the relevant party to incur expenditure, agree a limit on the amount of that expenditure. So in our example, instead of (or possibly in addition to) outlining the activities that the distributor is obliged to undertake, include a fixed cap on the amount of money that the distributor is required to spend in trying to achieve the sales target.

Notes:
1. IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335
2. Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292
3. Jet2.com Limited v Blackpool Airport Limited [2012] EWCA Civ 417
4. Terrell v Mabie Todd and Co. Ltd [1952] 69 RPC 234
5. Hiscox Syndicates Ltd v The Pinnacle Ltd (2008)

Tags: best endeavours, reasonable endeavours
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