Company Commercial Notepad - August 2010

 

1. Corporate:  A new UK Corporate Governance Code sets out standards of governance for listed companies. Companies are required either to follow the Code or explain how else they are acting to promote good governance.

The Financial Reporting Council ("FRC") has recently issued a new UK Corporate Governance Code, to replace the familiar Combined Code on Corporate Governance. The new Code applies to accounting periods beginning on or after 29 June 2010 and, as a result of the new Listing Regime introduced in April 2010, applies to all companies with a Premium Listing of equity shares whether incorporated in the UK or elsewhere. For financial years beginning before 29 June 2010 the 2008 edition of the Combined Code will continue to apply.

The recent global financial crisis triggered widespread reappraisal, locally and internationally, of corporate and fiscal governance systems. The FRC decided to bring forward its review of the Code, originally scheduled for later this year.

Two main conclusions were drawn by the FRC from its review. First, that much more attention needed to be paid to following the spirit of the Code as well as its letter and that some changes were needed so as to reinforce board quality, and to focus on risk and accountability to shareholders. Secondly, that there should be better interaction between the boards of listed companies and their investors.

These are the main changes:

• The company‘s business model should be explained and the board should be responsible for determining the nature and extent of the significant risks it is willing to take;
• Performance-related pay should be aligned to the long-term interests of the company and its risk policy and systems;
• All directors of FTSE 350 companies should be put forward for re-election every year;
• There are new principles on the leadership of the chairman, the responsibility of the non-executive directors to provide constructive challenge, and the time commitment expected of all directors;
• There are new principles on the composition and selection of the board, including the need to appoint members on merit, against objective criteria, and with due regard for the benefits of diversity;
• The chairman should hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.

To reflect the second of its conclusions the FRC has issued a new Stewardship Code which provides guidance on good practice for investors. The Financial Services Authority will separately consult on proposals to introduce a requirement for authorised asset managers to report on whether or not they comply with the Stewardship Code, in the same way as listed companies are required to "comply or explain" with the UK Corporate Governance Code.

Laytons can help with all aspects of Code compliance including reviewing risk management and performance related pay schemes.

 

2. Commercial:  Whose Terms Apply?  The "battle of the forms" was recently re-visited in the High Court

In a recent dispute between a supplier and a manufacturer, the High Court was asked to determine the contractual basis upon which the two parties had entered into business; each party contended that their standard terms applied. The High Court found that neither party's standard terms applied and that instead the contract was governed by, and incorporated, the implied terms of the Sale of Goods Act 1979. This ruling may have damaging consequences for suppliers as under the terms of such a contract their liability, the full extent of which is still to be determined in this dispute, is unlimited.

The facts of the case concerned the placing of orders by GHSP Inc for the manufacture of pedal sensors to be incorporated into one of its products, an electronic throttle pedal, which were to be sold on to Ford Motor Company. GHSP entered into discussions with AB Limited ("AB") for the manufacture and supply of the pedal sensors in November 2003 and the first orders for the goods commenced in 2004. In September 2006 AB supplied a defective batch of sensors to GHSP, which led to Ford incurring substantial consequential losses (including costs claimed by Ford in respect of the inspection of vehicles and replacement of parts). Ford claimed against GHSP and GHSP claimed in turn against AB.

The court had to determine the contractual basis of the business arrangement that GHSP and AB had entered into.  GHSP's standard terms provided for unlimited liability whereas AB's terms established a cap on liability.  Both parties had made it clear during the course of the business arrangement that neither accepted the standard terms of the other.  Instead the parties entered into a ‘battle of the forms', whereby each party sought to impose their standard terms on the other by being the last party to put forward its terms, usually on the back of standard forms such as a purchase order or invoice.  The terms were not explicitly rejected by either recipient before commencing performance of the contract. This case highlights the perils of adopting this approach.

The Judge referred to the parties declining "the opportunity to have a grown-up discussion about what the terms of [the] contract were going to be" and felt that:

"As must be the case very regularly in commercial discussions, both sides buttoned their lips, or fastened their seatbelts, and hoped that there would never be a problem, or that, if a problem arose, it would be a small enough one that, with goodwill, it could be settled "on a case by case basis".

The Judge felt that consequently both companies ended up in deadlock. Such was their impasse that the Judge felt it was not possible for the court to infer that one party had acceded to the other party's standard terms. Equally, the court could not conclude that there was no contract between the parties as clearly there was some form of agreement for the supply of goods. In such situations the judge felt that the statutory provisions of the Sale of Goods Act 1979 have to be implied into the agreement.  The statutory provisions do not provide for any limitation or exclusion on either parties' liability. 

Parties that fail to negotiate formal written contracts, and instead rely on the hope that future problems will not arise, may therefore find that contractual terms are implied at a later date which act to their detriment. Clearly suppliers will wish to avoid starting performance of a contract before the terms of the agreement are agreed. 

 

3. Data Protection:  New Model Clauses for organisations transferring Data outside the EEA

The European Commission has recently adopted a new decision updating the standard contractual clauses for the transfer of personal data to processors established in non-EU countries. 

One of the eight key principles of the Data Protection Act 1998 (the UK legislation implementing the EC Directive on data protection) is that personal data shall not be transferred to other countries without adequate protection of that data.  Transfer of data may arise in business in a number of situations but good examples are where certain functions are outsourced or where IT servers are based in a separate country (or continent).

Many countries outside the EC adhere to strict rules equivalent to, or stronger than, those of the EC (the US for example, operates a voluntary Safe Harbor Scheme in respect of personal data).  However, there remain some countries that are not yet recognised as offering an adequate level of data protection and the EC has developed standard clauses for contracts between UK data processors and processors based in such countries to attempt to address this. 

The recent updates to the standard contractual clauses take account of the expansion of processing activities outsourced by EU businesses to companies in developing countries.  The revised clauses, which came into force in May 2010, include specific clauses allowing the outsourcing by the data processor of its processing activities to other sub-processors, provided that the sub-processor is under a contractual obligation to treat the data with full respect to the EU data protection requirements, and provided that appropriate technical and security measures are in place in the country of final destination. 

The individuals to which the personal data in question relates are granted a right against the EU data exporter and, in certain circumstances, against the non-EEA data importer to enforce several of the contractual obligations under the clauses. 

Whilst the updated clauses are complex, they are a welcome update to the previous clauses which did not make adequate provision for the realities of modern data processing arrangements. 

In light of the recent strengthening of the Information Commissioner's ability to raise substantial fines, and the reputational risks of a high-profile breach of personal data security, any company with overseas data processing arrangements should review its arrangements with third parties (including overseas group companies) to ensure the necessary contractual controls are in place. 

Laytons can advise on all aspects of data protection both in relation to the UK and cross-border issues. 

 

4. Advertising:  ASA Rule that featuring people with disabilities in advertisements does not breach BCAP Code

A television advertisement featured a game of football being played by two blindfolded teams using a ball with a bell inside.  During the game a cat ran across the pitch with its collar bell ringing.  Before the referee could blow his whistle, one of the players was depicted taking a kick which was followed by a loud thud and meow although no contact was shown on screen.  At the end of the advertisement, the cat was shown walking along the branch of a tree.

1089 objections were received on the grounds that the advert was offensive to blind people and that the advert might encourage or condone cruelty to animals.

The ASA acknowledged that, prima facie, it was not offensive or disrespectful to create an advert involving people with disabilities.  On this occasion the advert was endorsed by and featured players from the England Blind Football Team and was considered to be a humorous depiction of a fictional situation.  It was therefore unlikely to be seen by viewers as malicious or undermining to blind people or to imply that blind people would be likely to cause cruelty to animals whilst playing football. 

It was acknowledged that whilst some found the advert to be in bad taste, it was not aimed at children, and because it was depicted in a light-hearted, surreal and farcical manner it was considered unlikely to be seen as a gratuitous or realistic portrayal of cruelty to animals.  It would therefore be unlikely to encourage or condone cruelty to animals. Notably, the advert showed the cat unharmed at the end.

Consequently, the advert did not breach rules 6.1, 6.2, 6.4 and 6.6 (relating to Harm and Offence) of the BCAP Code.

This ruling will be of interest to companies who seek to produce impact advertising campaigns, providing useful pointers on the manner in which to deal with potentially controversial or sensitive issues.

 

Laytons cannot accept any responsibility for any liabilities of any kind incurred in reliance on this Notepad. For specific advice on these issues, please contact your client partner or one of the team at the addresses set out below:

London
Richard Kennett email richard.kennett@laytons.com

Guildford
Ben Crichton email ben.crichton@laytons.com

Manchester
David Sefton email david.sefton@laytons.com

This Notepad is offered on the basis that it is a general guide only and not a substitute for legal advice. If you wish to copy this Notepad please do so, but please acknowledge its source.

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