Commercial and tech update - April 2023

Fail to specify the correct termination right? Prepare to fail

In Peregrine Aviation Bravo Limited and others v Laudamotion GmbH and another [2023] EWHC 48 (Comm), an airline lessee successfully defended a claim brought by the claimant following its refusal to accept delivery of an aircraft during the Covid-19 pandemic. While the judgment is specific to the facts of the case, the High Court came to a significant obiter conclusion: that the claimant was precluded from exercising its right to contractual compensation upon termination on the basis that the termination notice did not expressly mention the specific termination right being relied upon.

In this case, the termination notice (served by the claimant on the defendant) stated that the claimant had a right to terminate for non-acceptance of delivery and "certain additional Events of Default". While termination for non-acceptance did constitute an event of default under the agreement, the Court found that termination was not justified on the basis that the defendant had not wrongfully failed to take delivery of the aircraft. The claimant subsequently sought to rely on the defendant's alleged failure to make payment of sums due as being an insolvency-related "Event of Default" under the contract.

The Court considered (obiter) that, even if the insolvency-related "Event of Default" were applicable, the claimant would not have been entitled to recover losses as it found no evidence that the insolvency event prompted the claimant to terminate the contract as this "Event of Default" had been retrospectively identified as a ground for termination and was not explicitly referred to in the termination notice. The express termination clause in the agreement made clear that losses would only be recoverable if they arose "directly as a result" of the "Event of Default". The Court commented that even if the insolvency-related "Event of Default" was a valid ground for termination, there was no causal link between the "Event of Default" and the termination so compensation was not payable. 

Whilst the comments are obiter, this judgment should serve as a stark reminder to take extreme care when drafting termination notices as well as the need to consider all possible avenues for termination.

In the name of the (applicable) law

The Court of Appeal handed down a judgment in Al Mana Lifestyle Trading LLC & Ors v United Fidelity Insurance Company PSC & Ors [2023] EWCA Civ 61 on whether an "Applicable Law and Jurisdiction" clause in a series of insurance policies gave the English court jurisdiction over claims brought by the claimants under the policies. The clause in question provided as follows:

"APPLICABLE LAW AND JURISDICTION

[1] In accordance with the jurisdiction, local laws and practices of the country in which the policy is issued [2] Otherwise England and Wales UK Jurisdiction shall be applied,

[3] Under liability jurisdiction will be extended to worldwide excluding USA and Canada."

At first instance, the judge held that the clause gave any party the choice to bring proceedings in either the local court or in England and Wales. This decision was overturned by the Court of Appeal which held that the local court has primary jurisdiction, with a fallback for English and Welsh jurisdiction if the jurisdiction of the local court is not available. Lord Justice Males (with Lord Justice Nugee in agreement) giving the leading judgment made the following points:

• As the first sentence deals with both jurisdiction and governing law whilst the second sentence only deals with jurisdiction, this suggests that the first sentence is a primary rule with the second sentence operating as a fallback. This means that if the English court had jurisdiction, it would be required to apply the local laws and practices. Given that a foreign court is the best forum for the application of its law, this is a powerful factor in showing that the first sentence is mandatory.
• The words "in accordance with" are imperative and mandatory whereas the word "otherwise" can be regarded as the equivalent to "if not available." In other words, jurisdiction of the English and Welsh courts is only available if the local court does not or would not accept jurisdiction.
• Although the circumstances in which the local court would not accept jurisdiction might be very limited, in which case the second sentence is futile, there is no reason why the parties should not agree to confer jurisdiction on one court, with another as a fallback if the primary court is not available. This would be a sensible agreement to make.
• The appeal was challenged on the basis that it would create uncertainty as to where proceedings should be commenced. This argument was rejected on the basis that it would be a remote contingency for a claimant to go back and forth between courts in order to find out where it is entitled to sue.

Lady Justice Andrews dissenting in the minority was of the view that the judge at first instance was right in her construction. A reasonable policyholder, apprised of all the relevant circumstances, would not understand the clause to mean that bringing proceedings in the local forum was mandatory.

When parties enter into commercial negotiations, the governing law and jurisdiction clauses are often low on the priority list. However, a poorly drafted clause can create serious complications if legal proceedings are commenced by either party further down the line. It can affect which court has the jurisdiction to hear a party's case and the local law which governs a contract. Certain courts or legal regimes may provide a party with legal protections which can't be sought elsewhere. It is therefore important that parties clearly document which courts have jurisdiction (on an exclusive or non-exclusive basis) and the laws which will govern that contract.

Is agreement on fees enough to create a binding contract?

In the High Court case of Fenchurch Advisory Partners LLP v AA Limited [2023] EWHC 108, the High Court found that there was not a binding contract between AA Limited and Fenchurch Advisory Partners (the "Parties") despite extensive negotiations about the terms of engagement, significant work having been completed, and fee details agreed over email. This case serves as a pertinent reminder of the importance of properly executing engagement documents and ensuring the client inception documentation is properly completed.

The AA contacted Fenchurch, a provider of corporate finance advice amongst other services, to advise it in respect of the potential sale of the AA's insurance division as part of a wider restructuring by the AA. Fenchurch provided services for two possible sales of the insurance division whilst also negotiating the fee arrangements for these services. The proposal for Fenchurch's fees contained a mechanism for a percentage of the transaction value to form part of such fees in the event the transaction took place (a 'success fee'). Similarly, Fenchurch sought to negotiate an 'abort' fee in circumstances where: (a) AA prevented the transaction from completing between expressions of interest and firm offers; or (b) the transaction was prevented for certain other reasons. Despite these negotiations over fees, a finalised engagement letter was not signed between the Parties and the sale of AA's insurance division did not take place.

According to the High Court, no binding contract had been created between the Parties despite the work performed and the emails between the Parties in respect of the fee arrangement as the engagement letter was never finalised and executed. The High Court also held that the negotiations and correspondence about the fees indicated that the Parties considered that fees would ultimately be agreed and therefore no implied contract was in place as the Parties thought they would come to a binding agreement through these negotiations.

The AA was found by the High Court to be unjustly enriched if no payment was made to Fenchurch for the services performed and a restitution payment was ordered, to the amount of £350,000. This was the figure the High Court determined to be the price a reasonable person would pay and that as the proposed success fee had not been agreed, Fenchurch was not entitled to the £4 million it claimed was payable under that fee.

Whilst this case hangs on the context and the specific facts leading up to the claim, there is a clear message from the High Court to ensure engagement terms are signed by both parties in order to achieve the certainty of a legally binding contract.

WhatsApp agrees to comply with EU consumer protection rules

WhatsApp has agreed to be more transparent when making changes to its terms of service.

The Consumer Protection Cooperation Network ("CPC") sent letters in January and June 2022 to WhatsApp concerning its terms of service. The CPC explained to WhatsApp that, to comply with EU consumer protection rules, consumers must be clearly informed about WhatsApp's business model and informed whether WhatsApp derives revenues from commercial policies relating to users' data. Also, the European consumer organisation (BEUC) lodged a formal complaint against WhatsApp, alleging that WhatsApp's updates to its terms were not transparent and users were being pressured to accept them.

Following this, a formal dialogue was established between WhatsApp, the European Commission ("EC"), and EU consumer protection authorities. As a consequence of these discussions, WhatsApp have made the following commitments regarding future policy updates:

• WhatsApp will explain what changes it intends to make to the users' contracts and how the changes could affect the users' rights;
• The update will display the option to reject the updated terms of service as prominently as the possibility to accept them; and
• WhatsApp will ensure that any notifications linked to the updates can be dismissed or that the review of any updates can be delayed. It also agreed to respect users' preferences and refrain from sending repeated notifications.

WhatsApp also confirmed that it does not share users' personal data with other Meta companies or third parties.

The CPC will monitor WhatsApp's ongoing compliance with consumer protection law and will oversee whether WhatsApp follows the above commitments. If necessary, the CPC can enforce compliance, possibly by imposing fines.

This follows the introduction of the Digital Services Act ("DSA") in November 2022 which, together with other EU consumer protection law, works to encourage a safer and more accountable online environment. You can access our previous article on the DSA here.

For more information, you can access the EC's press release and the CPC's letters to WhatsApp here.

Government report urges UK to aim for light-touch tech regulation

Following extensive engagement across government, with regulators, industry and academic experts, Sir Patrick Vallance, the chief scientific adviser, has set out recommendations on future regulation of innovative technologies such as AI, data centres and future mobility (the "Review"). Set against the context of digital technologies challenging existing regulatory structures, the Review encourages the UK to be "bold" and to "seize the opportunity to champion a pre-innovation approach" and offers recommendations in three areas:

• Supporting a step-change in the UK's regulatory approach to AI;
• Facilitating greater industry access to public data to help deliver the government's public services transformation programme and address pressing societal challenges; and
• Government signalling and leadership to focus regulator efforts on innovation in autonomous vehicles, drones, cyber security, and space and satellite technologies.

On AI, the Review notes that, following industry engagement, there appears to be a 12-to-24-month window for the UK to establish itself as one of world's leading jurisdictions to build foundational AI companies, with other countries currently moving at a faster pace to provide clarity and a more friendly regulatory environment for innovators in the space.  Perhaps the most interesting of the Review's recommendations is the creation of a "multi-regulator sandbox for AI", which would constitute a live testing environment with a well-defined relaxation of rules to allow innovators and entrepreneurs to experiment with new products or services under enhanced regulatory supervision but without the risk of fines or liability. The Review suggests that the Digital Regulatory Corporation Forum would be well-placed to support the sandbox. The Review also recommends that the Government announces a clear policy position on the relationship between intellectual property law and generative AI so as to provide confidence to innovators and investors. A code of practice is recommended for generative AI, with a requirement that altered images are labelled as generated or assisted by AI.

The Review sets out a number of challenges which will need to be overcome if the UK is to achieve its goal of driving economic growth through its digital sector, which is currently growing at three times the rate of the rest of the economy. Such challenges include the fragmentation caused by multiple regulators with unclear and often overlapping jurisdictions, the risk posed by regulating too early, and the lack of current incentives for regulators to take risks and authorise new and innovative products. We must now wait and see which of the proposals come to fruition and whether the UK can position itself as the premier jurisdiction for the development of AI technology.

You can read the Review here.