Duty of good faith and relational contracts

In the recent case of Phones 4U Ltd (In Administration) v EE Ltd and others [2023] EWHC 2826 (Ch), it was found that there was no general duty to act in good faith because the agreement that had been entered into by the parties was not a relational contract.

While the agreement included an express term to act in good faith, it was narrowly interpreted by the court because it referred to a specific activity that EE was prohibited from doing.

Although no general duty of good faith was found in the above referenced agreement, it highlights the potential for an implied general duty of good faith to arise under other agreements where they are deemed relational contracts.

How could it impact your business?

Relational contracts are those based on trust between the parties. For example, they could arise in situations where the parties are entering joint ventures, outsourcing services, or in franchising and distribution arrangements.

While there is no single determining factor, an agreement may be deemed a relational contract where there is a combination of the following characteristics:

• It is long-term;

• There is extensive communication and co-operation between the parties;

• There is significant investment in the agreement;

• The parties must collaborate to perform the agreement; or

• The parties place confidence in each other.

On the other hand, where the parties are in competition with one another, as in the case of Phones 4 U and EE, this may be taken as a strong indicator against the existence of a relational contract.

If an agreement is found to be a relational contract it will impact the interpretation of the contract, and it will be challenging to rely on a strict interpretation of the terms. In the above case, the duty of good faith obligation was interpreted narrowly. However, it is likely that if it was deemed to be a relational contract, there would have been a much wider duty of good faith.

What steps should you take?

It is important that businesses are aware of the situations where a relational contract may arise because it could result in the business having more obligations than it was aware of, over and above what is explicitly set out in the agreement.

Where a relational contract arises, businesses should ensure that they avoid conduct which deviates from that which is considered honest, commercially reasonable and acceptable because there may be an implied term of good faith. In all cases where the circumstances suggest there is a relational contract, the parties should strive to play fair.

Further to our October update on ESG, the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations have been withdrawn, and on 7 November the UK Financial Reporting Council (FRC) made a policy statement update regarding its proposed changes to the UK Corporate Governance Code.

On 13 November 2023, the Quoted Companies Alliance published a revised version of its QCA Corporate Governance Code (available to members and for purchase by non-members).

On 30 October 2023 the FRC Lab published a report on how companies can improve their corporate reporting by taking a more focused, strategic approach to assessing materiality. It considers that the value of reporting is strengthened by the thorough review, ranking and removal of any irrelevant information. The report contains a toolkit to help companies report clearly on the issues that the board and management consider to be of most importance to stakeholders. While the content of the report is primarily focused on reporting, it will also be of value to wider strategic and risk management processes.

What has changed?

The FRC expressed its disappointment that the government's plan for primary legislation to modernise audit, corporate reporting, and governance is not prioritised for the next Parliamentary session. The FRC emphasised its commitment to reform and noted the consensus on the need for such reforms after the collapses of BHS and Thomas Cook.

The FRC also noted that while the government has not committed to introducing the requisite legislation to modernise the regulation of audit, corporate reporting and governance in the coming Parliamentary session, it has recently (in October) restated its commitment to doing so when Parliamentary time allows.

The FRC announced a selective adoption of proposed changes to the UK Corporate Governance Code (Code). Some streamlining and reduction of duplications in the Code will occur, with the main substantive change focusing on revisions to the FRC’s original proposals on internal controls.

Over half of the initial proposals to the Code will not be pursued at this time, including those regarding the role of audit committees on ESG, modifications to existing code provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders. The decision is influenced by stakeholder feedback and the government's withdrawal of its Statutory Instrument relating to audit and assurance policy, reporting on distributable profits and resilience statement requirements. The revised Code is now scheduled for publication in January 2024.

In contrast to this, the Quoted Companies Alliance has pressed on with its proposed reforms and on 13 November 2023, published the first revised version of the QCA Corporate Governance Code in five years. The QCA Code is tailored for small and mid-sized UK quoted companies and adopted by a large majority of AIM companies. The new version will apply in respect of accounting periods commencing on or after 1 April 2024.

Some of the key changes made to the QCA Code include a focus on ESG:

1. Wider stakeholder interests and ESG responsibilities (Principle 4):

   1. increased focus on "the workforce" as a key stakeholder, recognising the necessity of an engaged, motivated workforce to deliver shareholder value. Companies should ensure their practices towards employees are consistent with their values.

   2. environmental and social issues, including those relating to or stemming from climate change, should be integrated into strategy, risk management and business models. Companies should provide qualitative and quantitative disclosure in their annual reports and accounts regarding any ESG issues it has identified as being material to it, with reference to a company's purpose, strategy and business model.

2. Board Independence:

   1. boards are required to reflect on their own levels of diversity, ensuring that they possess the requisite knowledge and skillset while avoiding groupthink. Consideration should be given to factors such as socio-economic backgrounds, nationality, educational attainment, gender, ethnicity and age.

   2. boards should ensure they have the necessary skills and experience to fulfil governance responsibilities, including in relation to cyber security and sustainability matters such as climate change.

Following interviews with companies, investors, advisors and other stakeholders, the new report published by the FRC Lab, "Materiality in practice: applying a materiality mindset," encourages companies to think holistically about what information is material to their stakeholders when preparing annual reports. It provides practical suggestions and examples for identifying material issues, where reporting could be streamlined and prioritising key messages.

Key elements in the report include:

• Taking a holistic approach that connects quantitative, qualitative and sustainability-related factors across strategy, operations, and finances.

• Focusing on the key issues that management and the board are prioritising across the short, medium and long-term.

How could it impact your business?

Businesses should continue to monitor upcoming legislative developments around corporate governance reporting and ESG and be alive to any changes to whichever non-statutory corporate governance code they are required, or choose to adopt. Businesses need to be ready to adapt their internal controls and reporting accordingly.

Businesses should keep an eye out for the updated Code which is expected to be published in January 2024.

What steps should you take?

Businesses should stay informed about the FRC's selective adoption of changes to the Code. Given the reduced scope of proposed revisions, companies may experience a more targeted and proportionate impact on their internal controls.

Businesses should monitor developments in the FRC's approach to guidance, especially as the Stakeholder Insight Group gains an additional remit to advise on improving guidance and striking the right balance between effective governance and reducing unnecessary burdens. Lastly, companies should engage in the upcoming review of the Stewardship Code, recognising its potential impact and the need for collaboration with other regulators.

Checklist

There are a number of mandatory reporting requirements for UK companies. The mandatory reporting requirements a company may face are dependent on which of the below categories it would fall into:

• Quoted company with more than 500 employees;

• AIM listed company with more than 500 employees;

• Large private company;

• Medium-sized private company; or

• Small private company.

The mandatory reporting requirements cover a range of ESG factors, including environmental disclosures, climate-related financial disclosures, social and governance disclosures, and specific reporting obligations for various company types listed above. Should you wish to know more or require assistance on these reporting requirements please get in touch.

The Online Safety Act 2023

The Online Safety Act 2023 (OSA) received royal assent on the 26 October 2023, its aim is to make internet services safer for users.

Ofcom has been selected as the regulator that will oversee enforcing compliance with the legal provisions. It will be running consultations that will be split into different phases with each different phase bringing draft guidelines and codes of practice, the first of these launched on 9 November 2023.

It is expected that the first new duties will take effect at the end of 2024.

How could it impact your business?

The Act is aimed at service providers that offer ‘user-to-user’ services (such as blog platforms) and search services, as well as those that publish or display pornographic content.

Under the provisions of the Act, these Service Providers will be obligated to prevent, identify, and remove illegal content. They will also have an obligation to put additional measures in place to prevent children from seeing content that is harmful to them.

Once its increased powers come into force, Ofcom will have the power to fine up to £18 million or 10% of global revenue, whichever is bigger. Bosses could also face jail sentences if they do not take steps to mitigate changes requested by the regulator aimed at protecting children.

What steps should you take?

Any business that is likely to be caught by the provisions of the Act should consider participating in the consultation process. Details of consultation phases are as follows:

• Phase one, containing the draft proposals in relation to protecting people from illegal harm, is now live and is expected to close on 23 February 2024.

• Phase two, containing draft proposals for child safety duties and pornography, is scheduled to begin in Q4 2023 / Q1 2024.

• Phase three, containing draft proposals for duties on categorised services, including transparency, is expected to start around Q2 / Q3 2024.

Artificial Intelligence (AI) Safety Summit – Frontier AI

The Department for Science, Innovation & Technology (DSIT, which replaced DCMS) hosted the AI Safety Summit on the 1 and 2 November 2023.

To supplement the summit, DSIT produced a discussion paper that considered the likely risks and benefits of ‘Frontier AI’.

The discussion paper contains a detailed breakdown of the current and future capabilities of Frontier AI alongside highlighting the possible benefits and risks the technology may bring. It defined Frontier AI as “highly capable general-purpose AI models that can perform a wide variety of tasks and match or exceed the capabilities present in today’s most advanced models”.

These kinds of models form the foundations of programmes such as ChatGPT.

How could it impact your business?

The capabilities of the systems are likely to continue to improve in the future, as computing power, data availability and functionality of algorithms increase. The gain from the technology has the potential to revolutionise government, businesses, and personal life.

Risks and limitations
Frontier AI has been known to ‘hallucinate’ by producing answers that are not true by finding patterns in data that are not there. The recent case of Mata v. Avianca, Inc., 1:22-cv-01461, (S.D.N.Y.) evidences the pitfalls of relying on the technology without checking the content.

The discussion paper also noted many risks that Frontier AI could bring. These ranged from issues with how the technology is being developed (in an unregulated way without safety standards) to how the technology could be used (creating disinformation, labour disruption, bias and cyber security concerns).

One of the biggest issues facing businesses is Cyber security. Modern AI systems are likely to increase the risk posed as they could potentially allow anyone to create specifically tailored phishing exercises at a rapid rate not seen before. Advanced AI systems could create computer viruses that change over time to avoid detection. In the future, it may be commonplace that there are AI systems that both create and detect cyber security issues in a never-ending battle between creator and defender.

What steps should you take?

The use of AI within businesses is likely to increase exponentially in the near future. DSIT is aware of this and understands that more research is required to fully appreciate the risks.

It is important that all business who plan on using AI:

• give early consideration to data protection, IP and regulatory requirements when developing AI systems;

• implement internal governance procedures to manage the development, implementation and monitoring of AI systems;

• try to ensure that there is human input in the system at some point to avoid inaccurate output;

• carry out pre-contractual due diligence when selecting an AI system provider and when considering AI contracts; and

• try and always take a best practice approach to ethical and data protection matters.

   

International Data Transfers

The UK Department for Science, Innovation and Technology (DSIT) has released a report from its International Data Transfers Expert Council (Council) setting out future plans for global data transfers, which can be viewed here.

The report analyses the existing challenges and proposes solutions to creating a more sustainable and scalable approach to international data transfers. It contains 8 Council recommendations to the UK Government and international community, aimed at creating the foundations for a multilateral framework for trusted and responsible data flows globally.

The report is the output of the Council’s research and work since its inception in 2022. The Council’s purpose is to provide independent advice to the UK Government in its drive to capitalise on the benefits of international transfers whilst maintaining high standards.

How could it impact your business?

The report notes that ‘at least 85% of UK service exports worldwide were data enabled’. Any future, globally-agreed ‘solution’ to data transfers (whether spear-headed by the UK Government or otherwise) has the potential to impact any business that relies on transferring data internationally (whether that be between its corporate group companies, customers and/or suppliers).

The solutions and recommendations made within the report represent one of a number of initiatives the UK Government is currently working on to drive more robust collaboration regarding tech and data globally. The recommendations are options for routes the UK Government could seek to pursue and lead on internationally (not all will necessarily be advanced simultaneously, or at all).

What steps should you take?

As the report makes clear, a large proportion of the UK service exports currently contain an element of data. This is only set to increase as technology and data becomes ever more present in work and private life.

In addition to safeguarding international transfers in accordance with the existing data protection regimes, businesses operating across borders should keep a watching brief on UK and international Government initiatives that have the potential to alter how such transfers will be enabled and need to be protected in future.

UK Product Safety Reform

Proposals for a significant overhaul of the UK regulations governing product safety are being considered in an attempt to simplify and update the current legal framework as part of the Government’s “Smarter regulation: UK product safety review”.

The increased use of online retail sales, out of date and complex regulations and the new General Product Safety Regulations 2023, which comes into force in the EU in December 2024, has led to a number of substantive reforms being considered following a recent consultation by the Department for Business and Trade and the Office for Product Safety and Standards (OPSS).

How could it impact your business?

The intended changes to the UK regulatory framework are strikingly similar to those contained in the proposed EU Regulations to avoid any substantive divergence between UK and EU legislation. The key reforms being:

• The consolidation of all enforcement legislation under current consumer/product legislation to provide one system of compliance, recall and enforcement;

• The OPSS providing local authorities with detailed guidance as to the principles to be applied when enforcing the relevant legislation;

• Enhanced powers for local authorities for enforcement to include improvement notices and financial penalties;

• Centralisation of reporting product safety failings and recalls through the OPSS shifting the emphasis from local to national level;

• Potential categorisation of products by hazards or risk (rather than product type or sector);

• Modernisation to reflect changes in technology and to ensure the online marketplace is subject to proportionate responsibilities to include introducing specific duties such as exercising due care and removing unsafe product listings, in addition to ongoing importer or distributor obligations.

What steps should you take?

Although it is not clear how the Government will implement the proposals, it is inevitable that primary legislation will need to be introduced to fully reform the UK product safety framework, although some of the proposals could be carried out through its powers in retained EU law to bring about a single coherent framework.

Economic Crime and Corporate Transparency Act

The Economic Crime and Corporate Transparency Act (ECCTA) received Royal Assent on 26 October 2023. It creates a new corporate offence of failure to prevent fraud for large corporates and extends the identification principle to make it easier to prosecute companies and partnerships for economic crimes.

The Act supplements the Economic Crime (Transparency and Enforcement) Act 2022 which was passed following Russia’s invasion of Ukraine and introduced a register of overseas entities and a requirement for overseas entities owning property in the UK to apply for registration and provide information about their beneficial owners.

The ECCTA builds on the Home Office’s commitment to address a sharp rise in economic crime in the UK and proactively target organised criminals and those who use UK corporate structures to abuse the UK’s open economy.

The ECCTA brings in key reforms for Companies House, including heightened identity checks for new and existing directors, Persons with Significant Control and those delivering documents to the Registrar. Additionally, Companies House gains additional investigative and enforcement powers.

How could it impact your business?

Businesses face heightened regulatory scrutiny and compliance obligations, particularly in the areas of identity verification and transparency measures.

Large corporates, that is organisations that meet two out of three of the following criteria (i) over 250 employees (ii) over £36m in turnover and/or (iii) more than £18m in assets, will also be caught by the new corporate offence of failure to prevent fraud.

Under the new offence, unless an organisation is able to demonstrate that it has in place reasonable prevention procedures, it will be liable for any fraud committed by a person associated with the organisation which is intended to benefit the organisation. If an organisation is found guilty of this offence, it is punishable by unlimited fine.

What steps should you take?

Large organisations should review and, if necessary, implement robust anti-fraud prevention measures to avoid the risk of an investigation and prosecution under this new offence. The Government will issue guidance in relation to fraud prevention procedures before this aspect of the ECCTA comes into force.

Commercial disputes & the use of Alternative Dispute Resolution

In a recent judgment in the case of Churchill v Merthyr Tydfil County Borough Council, the Court of Appeal resolved any doubts that might have existed over whether parties to litigation can be compelled against their will to engage in Alternative Dispute Resolution (ADR). The Court concluded that yes, they can.

The language used was not "ADR", instead "non-court-based dispute resolution", which includes all forms of ADR/mediation but in fact is broader than that, incorporating for example, a complaints process.

How could it impact your business?

Whilst this can be taken as confirmation of what we already knew, it is now beyond doubt that arguments that an order compelling ADR deny a party access to justice/the Court now seem pretty futile, the rationale seemingly being that that right has not been taken away absolutely and can be exercised later if still needed.

What steps should you take?

Where you are engaged in complex business critical disputes, you will assess the merit in agreeing to ADR on a case by case basis. With an ADR process such as mediation for example, timing can be everything, and sensible submissions around that can still be made notwithstanding this ruling. But if you consider that many disputes escalate when parties stop communicating effectively, the Court's willingness to step in may prove valuable where impasse is being created by your opponent.

Certainly, what is clear is that if you're a Defendant facing a claim brought prematurely and which could/should have been advanced in a different, more appropriate way, this ruling will be useful ammunition. And if you are a corporate/organisation which deals with consumers and has a complaints process in place, you should be able to block premature recourse to the Court and insist on its use.

New Year changes to holiday entitlement and holiday pay

From 1 January 2024 we are likely to see important changes introduced by the Government to the principles around holiday accrual and pay. These changes are aimed at doing two things: (i) preserving (for the most part) holiday pay principles derived from EU law while (ii) clarifying and simplifying holiday pay/entitlement for casual/part-year workers.

Many EU rules on holiday entitlement and pay will be ‘continued’ in the new regulations and will not be lost when the wider principles of EU supremacy over UK law are ended on 31 December 2023.

The new regulations on holiday pay, if shortly approved by Parliament, will follow Government proposals set out in two separate consultations dealing with holiday entitlement for part-year and irregular hours workers, along with dealing with the legal reforms following our departure from the EU.

How could it impact your business?

Currently, all workers are entitled to 5.6 weeks’ holiday each year. This entitlement is split into a 4-week “EU-derived” entitlement and a 1.6-week “UK-derived” entitlement. Different rules apply to each in respect of carry-over and what elements of pay to include in holiday pay.

The Government is keeping the two distinct ‘pots’ of annual leave and the two existing rates of holiday pay for workers who work throughout the year. This will mean that such workers will be entitled to the status quo, to receive 4 weeks at their ‘normal’ rate of pay (often including overtime and shift allowances which form an intrinsic part of their job). They will then be entitled to receive a further 1.6 weeks at their (often lower) basic rate of pay.

In terms of carry-over, workers' existing rights to carry over untaken holiday where they have been unable to take the holiday in certain situations, which is derived from EU case law, will be expressly preserved in the new regulations.

The Government had proposed to introduce two further measures for all workers to reform and simplify holiday pay: 1) simplified calculations for holiday pay and 2) the use of “rolled-up” holiday pay (i.e. paying holiday as a flat percentage of hours worked). While these plans are going ahead, the Government has now decided to limit this to the narrower class of irregular/casual hours workers and part-year workers (which cause the greatest calculation difficulties).

What steps should you take?

Actions for employers fall into two parts: (a) review of entitlement for ‘whole-year’ workers (who work throughout the year) and whose rights remain the same, and (b) consideration of contractual changes for those who have irregular, term-time or part year work, whose rights will change.

Regarding whole-year workers, where staff have not been paid their normal remuneration (including regular overtime and commission) for the 4-week EU based holiday entitlement, a change in approach will be required, given that the EU rules are here to stay (for now). It will be sensible to review employment contracts and holiday policies and consider specifying the order in which annual leave is taken, as well as making it clear that workers should take their holiday and warning of the risk of losing it at the end of the holiday year where they have not taken it.

For irregular hours/part-year workers, employment contracts and holiday policies should be amended to reflect the new (simplified) accrual rules. It would also be sensible to identify in employment contracts the order in which leave is taken so it is clear which rights apply when a worker is taking leave (in terms of pay) or seeking to carry over untaken leave. Given rolled up holiday pay will be permitted, thought should be given as to whether to use that approach or calculate holiday pay when leave is taken.

The 4-Day Week Debate – can less ever be more?

The Department for Levelling Up, Housing and Communities (DLUHC) has recently issued a formal notice to Cambridgeshire District Council, citing its concerns around whether the Council’s 4-day working week trial offers value for money to taxpayers.

Employers have wrestled with the question of value for money in relation to 4-day working weeks (whereby staff typically work 80% of their normal hours over 4 days but retain 100% of their pay) since their inception. Various arguments are made on either side of the debate, and it’s clear where the current Government feels public services should sit on the issue.

How could it impact your business?

A 2022 CIPD report examined employer perspectives on the 4-day week. It cited that 3 in 10 people would like to work fewer hours, but only 1 in 10 are willing to take a pay cut to achieve this. This leaves employers with the dilemma of needing to achieve a 25% boost in employee productivity for a 4-day week to make economic sense and be embraced by employees.

The Government’s recent pressure on Cambridgeshire District Council highlights the concern that, despite the perceived benefits to employee’s wellbeing, businesses may not see the uptick in financial return. Given the UK’s current economic landscape and medium to long-term outlook, this may feel like a wellbeing measure too far.

The results of the UK’s 4-day week pilot, released in February of this year, were promising on the issue of workforce satisfaction and productivity. It found that revenue held firm (rising slightly by 1.4% over the trial) and was up 35% in comparison to the same period in 2021. Improvements in hiring, absenteeism and resignations were also recorded.

What steps should you take?

Employer’s considering a 4-day week will often test the water with a trial period. The trial will provide scope to analyse data collected on productivity and staff wellbeing before committing to any permanent change in working patterns.

If moving from experimentation to implementation, thought would need to be given to the approach for staff who currently work a 4-day week (or less) as they could argue unfair treatment if colleagues switch to working 4-day weeks but are effectively paid for working 5 days per week (i.e., 100% of their weekly pay).

Trans Women with Gender Recognition Certificates

October's horizon scanning highlighted the recent focus by the Regulators (FCA and PRA) on Equality and Diversity.

In a ruling relevant to this area, the Scottish equivalent of the Court of Appeal has recently confirmed that the definition of “woman” in the Equality Act 2010 includes trans women with a gender recognition certificate (GRC). The definition was examined in the context of ensuring gender balance on public boards.

How could it impact your business?

The Government Equalities Office estimated in 2018 that between 200,000 and 500,000 trans individuals lived in the UK. To recap, subject to certain conditions, a trans person who is at least 18 years old can apply for legal recognition of their "acquired gender" through the issue of a GRC. Once a full GRC has been issued, a person's gender becomes, "for all purposes", the acquired gender.

Whilst the Scottish court’s decision is not technically binding on employment tribunals outside Scotland, it could still be cited in any case in which the definition of "women" under the Equality Act 2010 is in dispute. In addition to protection on the basis of “gender reassignment” trans women could therefore argue to be protected on the grounds of sex (as a female) under the Equality Act.

What steps should you take?

One area in which this decision is relevant is in relation to the FCA and PRA consultations over regulatory measures in the sector on diversity and inclusion mentioned last month.

Given that a key aspect the regulators’ interest will likely involve diversity targets, it will be important to keep under review who will be classified as a “woman” under the Equality Act, and adopt a consistent definition accordingly. It could be argued that trans women with a GRC ought now to be classed as women for the purposes of diversity targets and policies.

Interestingly, FCA policy currently allows UK firms to exclude trans women from such targets and to instead choose whether they use trans employees’ sex or gender for the purposes of reporting. It’s also likely that the UK Government will clarify its position on sex and gender under the Equality Act in the near future.

Generally, it may be necessary to review and update any training materials and policies, which will in turn help to reduce the risk of discrimination claims being brought against the business. In so doing, however, one complication is that staff should not usually ask staff individually whether they have a GRC.

Ground rent cap consultation

As part of its leasehold reform drive, the Government has published a consultation on capping ground rents in existing residential leases that pre-date 30 June 2022 in England and Wales. The consultation is open for six weeks from 9 November 2023, closing on 21 December 2023.

The consultation seeks views on the issues that ground rents cause for leaseholders and proposes the following options to limit ground rents:

1. capping ground rents at a peppercorn;

2. setting a maximum ground rent value (suggested at £250 per annum);

3. capping ground rents at a percentage of the property value (proposed at 0.1%);

4. limiting ground rent at the original amount on grant of lease; or

5. freezing ground rent at current levels.

The finer details, including if reviews of ground rents are to be permitted (by fixed or index linked increments in respect of options 2 or 3 only), if any leases are to be exempted and the duration of the transitionary period, are also being considered.

There is no option to preserve the status quo so the outcome is likely to follow through on the Government’s commitment to introduce reforms to existing ground rents through the Leasehold and Freehold Reform Bill.

How could it impact your business?

The result may have a significant adverse financial effect on the value of portfolios held by professional and institutional landlords, and investors that rely on ground rent as a stable, long-term income stream. The scale of this loss would be linked to the selected cap option.

The possibility of the Government retrospectively varying a term agreed between two consenting parties to a contract may have wider implications, such as creating uncertainty in the principle of freedom of contract.

What steps should you take?

Review your ground rent portfolio and consider the effect that each of the proposed caps may have. If the proposals are likely to impact you, then you may wish to consider responding to the Government’s consultation.

Russian Sanctions: Control must be actual not theoretical

Both the UK government and the judiciary have clarified that when considering the question of whether an entity is controlled by a sanctioned individual/ designated person (DP) for the purposes of the Russian Sanctions Regulations 2019 (Regulations), one must determine who is in actual control of the company, rather than speculating on the possibility of future control by a DP.

The confusion arose following the Court’s decision in Mints v PJSC National Bank Trust [2023] in which the Court found that the concept of “control” in the Regulations could include “political control”. In accepting this proposition, the Court commented that a consequence of this position was that President Putin could be deemed to be in control of everything in Russia.

In the recent case of Litasco SA v Der Mond Oil and Gas Africa [2023], the Court clarified that while it was theoretically possible for Putin to gain ownership of privately owned, Litasco, at some point in the future, the relevant question under the Regulations was who was in actual control in the present moment.

The UK government agrees. In guidance published by the Foreign Commonwealth and Development Office (FCDO) and the Office of Financial Sanctions Implementation (OFSI), the government makes it clear that there is no presumption that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which the official has a leading role in economic policy or decision making. Most specifically it makes it plain that the UK government does not consider that President Putin exercises indirect control over all businesses in the Russian economy merely by virtue of his role as President. In every case, the question will be one of fact and degree.

How could it impact your business?

The Regulations prohibit a person from making funds available to a DP, or a person (or company) owned or controlled by a DP. A person can be said to own or control another entity if they (i) directly or indirectly own more than 50% of its shares or voting rights, (ii) has the direct or indirect right to appoint or remove the majority of its board or directors; or (iii) is able to ensure that its affairs are conducted in accordance with their wishes.

What steps should you take?

Following the clarification in Litsaco, as well as the Government’s guidance, businesses will still need to ensure that they carry out appropriate due diligence to ensure that they do not fall foul of this prohibition and consider the particular circumstances of each case. While they must remain cautious not to breach the Regulations, it is not open to them to simply claim that payments cannot be made to any Russian entities simply as a result of the wide-ranging powers held by President Putin.

This year’s state opening of parliament marked the first speech delivered by King Charles III and the last before the next general election. The King’s Speech, having been prepared by the government, outlined the government’s priorities for the coming parliamentary session (2023-2024).

The speech introduced 21 bills, six of which were carried over from the Queen’s Speech 2022. Of particular interest are the following bills.

The Arbitration Bill

According to the King’s speech background briefing notes, the bill intends on modernising the law on arbitration, strengthening the courts' powers and facilitating quicker dispute resolution. The bill follows the recommendations of the Law Commission of England and Wales. Though the King’s Speech did not confirm if all recommendations put forward would be put before parliament, the briefing notes highlight the main areas of reform as:

• Governing law of an arbitration agreement – the introduction of a new default rule which governs arbitration agreements; in the absence of the express agreement between the parties regarding the governing law of the arbitration agreement, the default rule would be in favour of the law of the seat of arbitration.

• Arbitrators’ duty of independence and disclosure – the codification of the arbitrators common law duty (under Halliburton v Chubb) to disclose any circumstances where their impartiality may reasonably be deemed to be compromised.

• Arbitrators’ immunity – extending arbitrators’ protection against any applications for removal and resignations.

• Summary disposal – the introduction of a new default power for arbitrators to issue an award to dispose any issue, claim or defence which lacks merit on a summary basis.

• Challenging an award for lack of substantive jurisdiction – the limitation of the parties’ ability to rely on new grounds, or evidence when appealing.

• Courts’ supportive powers – the extension of the courts’ power to cover third parties and peremptory orders made by emergency arbitrators.

The Digital Markets, Competition and Consumers Bill

The bill will introduce substantial reforms to competition rules for digital markets and will focus on rebalancing the UK’s merger control regime to ensure that the Competition and Markets Authority’s (CMA) attention is focused on transactions that have the potential to weaken competition. 

Changes to the digital market regime

The bill amends the definition of ‘strategic market status’ (SMS) and provides that a firm may have a SMS if:

• the digital activity is linked to the UK;

• the firm has substantial and entrenched market power;

• the firm has a position of strategic significance; and

• the turnover condition is met.

The bill also introduces a requirement for all CMA decisions to be ‘proportionate’ and deliver consumer benefits.

Consumer protection aspect

Under the new bill the CMA will have the additional powers, such as:

• The ability to investigate and take action against any suspected infringements of the Consumer Protection from Unfair Trading Regulations 2008 (CPRs) without going to court.
• The ability to issue infringement notices, impose sanctions and negotiate consumer compensation.

• The ability to impose significant fines (up to 10% of a business' global turnover) to those infringing the regulations.

Competition aspect

The bill introduces a new article relating to funding arrangements in response to the UK Supreme Court judgment in PACCAR.

The Data Protection and Digital Information (No 2) Bill

The bill will be renamed to just Data Protection and Digital Information Bill (DPDI Bill). Our September 2023 Horizon Scanning details the Bill’s objectives at length but in short, the DPDI Bill intends on modernising the UK GDPR and Data Protection Act 2018 and simplifying data protection laws for businesses to reduce their data protection burdens.

We will continue to monitor the progress of the bills introduced by the King’s Speech and shall provide further guidance.