Commercial and tech update - July 2023
Welcome to our latest commercial and tech update. In this edition we look at:
- The UK Government's International Technology Strategy, which sets out its roadmap for 'tech superpower status';
- A reminder from the Court of Appeal as to the approach to be taken when parties intend for there to be a binding contract;
- The importance of ensuring terms and conditions are easily accessible to consumers and not unduly burdensome; and
- A High Court case which emphasises how crucial precise drafting is in commercial contracts to avoid uncertainty of terms.
UK Government announces International Technology Strategy
On 22 March, the government released its International Technology Strategy (the "Strategy"). The Strategy is described as a roadmap for reaching 'tech superpower status' by 2030. It is guided by four principles: open, responsible, secure and resilient.
The strategy is guided by six priorities:
- Priority technologies and data – The government will focus on five emerging technologies (AI, quantum, semiconductors, telecoms and engineering biology).
- International partnerships for global leadership – The strategy emphasises the need to support shared growth and address global challenges. It discusses the UK's digital partnership with Japan and its bilateral trade agreement with Australia as examples of the prioritisation of technology-based partnerships.
- Values based governance and regulation – The government aims to strengthen the global governance of critical, emerging topics such as AI and telecoms diversification.
- Technology investment and expertise for the developing world – The government will create a new Technology Centre of Expertise that provides access to expertise from the UK government. The strategy aims to increase connectivity in underserved markets and close the digital divide.
- Technology to drive the UK economy – The government will promote UK tech exports. It will promote the UK as the best place for tech companies to raise capital, making the UK a global tech IPO hub and encouraging global tech companies to list on UK markets.
- Protecting the UK's security interests – The government will address security interests in the development of technological standards and regulations. The government plan to use the National Security and Investment Act to mitigate national security risks arising from foreign direct investment in emerging technology.
The strategy aims to encourage agility by reducing unnecessary barriers and harnessing technological innovation, echoing the approach of the government's AI white paper that was published in March.
James Cleverly, Foreign Secretary, used the strategy to underline the UK's differences to other international approaches. Cleverly states that authoritarian regimes have an alternative vision of harnessing technology for their own ends, whereas the UK and other 'like-minded' nations aim to promote the open, responsible, secure and resilient development and use of technology.
The strategy certainly outlines an ambitious plan to promote technology as a central part of the UK's development going forwards. The next few years will show whether the government can keep on top of ever-changing technologies and achieve its goal of being a 'tech superpower'.
For more information, you can access the full strategy here.
A binding lock-out clause renders other heads of terms non-binding
In Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd  EWCA Civ 482, an energy company ("Pretoria") negotiated with a landowner ("Blankney") to secure a lease. The parties signed a document labelled "Heads of Terms of Proposed Agreement" ("Heads of Terms"). The Heads of Terms contained a provision that the parties would not negotiate with third parties for a certain period of time. While the parties agreed that this constituted a binding lock-out clause, the parties disagreed as to whether the Heads of Terms also constituted a binding contract for a lease.
While the Heads of Terms stipulated that a formal agreement would be agreed within one month of Pretoria obtaining planning permission, they were not marked as being "subject to contract". Notably, however, the Heads of Terms included some terms for the proposed lease, such as rent value.
After the expiry of the lock-out period, Blankney agreed a lease with a third party. Pretoria argued that Blankney was in breach of contract as it was obliged to lease the land to Pretoria. The High Court held that the Heads of Terms were non-binding, except for the lock-out provision.
In the appeal judgment, the judge provided an overview of the approach taken when deciding whether there is a binding contract. The judge must consider the parties' words and conduct and whether such communication leads to an objective conclusion that the parties intended to create legal relations.
The Court of Appeal upheld the High Court's judgment. Some key takeaways include:
- Expenses: Pretoria took steps to prepare for the lease such as incurring expenses in obtaining planning permission. However, the judge stated that it is entirely plausible that a party to a putative contract will incur expenses in the reasonable expectation that a binding agreement will be reached in due course.
- Are terms yet to be agreed or documented: If there is clear offer and acceptance, an intention to document a contract formally in the future does not prevent a binding contract from arising. Parties can also be bound even if further terms still need to be agreed. However, in this case, there were many outstanding matters to be negotiated in relation to the proposed lease. As such, the Heads of Terms could not constitute a binding contract for a lease.
- Using words to express negative contractual intention: The Heads of Terms were not marked as "subject to contract" – the judge stated that this wording would have put it beyond doubt that the parties did not intend to be contractually bound. However, the use of "Heads of Terms" is not conclusive evidence that a document is binding or non-binding.
- The lock-out clause: As above, both parties (and the judge) were in agreement that the lock-out clause was legally binding – this was not at issue in the case. The existence of a binding contract for a 25-year lease was incompatible with this binding lock-out clause. This is because the lock-out clause clearly anticipated that the parties would be free to negotiate with third parties after the expiry of the lock-out period. Therefore, a binding contract for a lease could not yet be in place, as the parties agreed via the existence of a lock-out clause that the prospect of a lease was uncertain.
Though this case relates to a lease, the points above have wider application to the construction of commercial contracts. At the outset of negotiations, parties should decide whether they intend a document to bind and reflect this intention through explicit statements.
All bets are off – gambling operator defends claim against £1 million pay-out
In Parker-Grennan v Camelot  EWHC 800 (KB), the High Court dismissed a summary judgment application from the Claimant in respect of the winnings paid out by the Defendant, the online gaming operator of the National Lottery. The Claimant played the "£20 Million Cash Spectacular" on her laptop which involved matching any "winning number" to any of "your numbers" in order to secure a cash prize. After playing the game, two numbers flashed up informing the Claimant that £10 had been won, although two further numbers also matched (but did not flash up) which indicated a further prize of £1 million had been secured. However, when the Claimant clicked the "finish button", her prize was calculated as £10.
The Defendant contended that only £10 was payable as this amount had been pre-determined just after the play button was pressed to start the game and it was a coding issue which caused the two further numbers to be displayed. The Claimant argued that these points were red herrings; the game had shown that two wins had been achieved so the Claimant would be entitled to £1,000,010.
In his judgment, Jay J held that the case would be decided on three issues:
- Incorporation: What were the contractual terms between the parties?
- Enforceability: Were any provisions rendered unenforceable by reason of the Unfair Terms in Consumer Contracts Regulations ("UTCCR")?
- Construction: Given (1) and (2), did the Claimant win the £1 million?
Issue 1: Incorporation
The Defendant sought to incorporate three sets of terms. Jay J said that the test of incorporation required the Court to assess whether (i) the terms had been incorporated; and (ii) whether there were any onerous or unusual clauses which required specific sign-posting.
On the first limb, it was held that the terms were incorporated, as there were sufficient hyperlinks and drop-down menus which the Claimant could clearly access and accept before playing the game. On the second limb, it was held that the relevant terms which protected the Defendant's position were neither onerous nor unusual. Amongst other things, the terms stated that the finish button had to be pressed to complete the game, the outcome of the game was predetermined at the point the player buys a game and all games had to be validated by the supplier.
Issues 2: Enforceability
UTCCR provides that a term which causes a significant imbalance between the parties to the detriment of a customer may be considered unfair and unenforceable. The Court held that all clauses on which the Defendant needed to rely in order to win the application were enforceable. The clauses were clearly drafted and well signposted; it was fair for the Defendant to explain that the game was a pure game of chance to be determined as soon as the play button was clicked and the Defendant's validation process was reasonable to ensure the integrity of the National Lottery and to protect the Defendant's odds and pricing structure.
Issues 3: Construction
It was of no relevance that the Claimant saw a screen that said that £1 million had been won. The terms of the game were clear – a win is shown by flashing white numbers and a message stating the win amount and the player must select finish to complete the game. Additionally, the amount payable to the Claimant was recorded on the Defendant's centralised list after the Claimant's play. The outcome of £10 was the intended and actual result.
When drafting terms and conditions, it is important to remember that these should be easily accessible to consumers and the terms should not be unduly burdensome. Any particularly onerous terms should be specifically signposted to consumers such as through different font sizes and colours. Although there is a degree of subjectivity involved in deciding whether a term is "fair", businesses should ensure that terms are not significantly weighted in their favour to the detriment of consumers.
Royalty based on gross income excludes rebates
In Eteboxagu AB v Cycle Pharmaceuticals Ltd  EWHC 462 (Comm), the High Court held that the definition of "Relevant Revenues" did not include rebates from the income received from the sale of products in the US pharmaceuticals market.
As part of an agreement between Cycle Pharmaceuticals Ltd ("Cycle") and Eteboxagu AB ("Eteboxagu"), Cycle paid Eteboxagu royalties on products sold. These royalties were calculated as a percentage of "Relevant Revenues", a term which had been defined in the agreement as "gross income from the sale of the Product excluding VAT and transport costs". As part of the commercial arrangements with customers in the United States, Cycle negotiated terms with health insurers' pharmacy benefit managers ("PBMs"). These PBMs are responsible for approving drugs onto a list for use by those health insurers. The judgment explains that where there are competing drugs on the market, a rebate arrangement with PBMs is a commercial necessity and some government-backed schemes (Medicare and Medicaid) even have a fixed level of rebate.
The key issue in this dispute was that Cycle had deducted these rebates from the bucket of monies from which Eteboxagu's royalties would be calculated. Eteboxagu claimed that this had led to an underpayment of royalties valued at around $1.5m. Eteboxagu's submission was that an ordinary meaning of "gross income" meant prior to deductions and that the express exclusion of VAT and transport costs supported that interpretation. The judgment held that both parties were aware, at the date of the agreement, of the drug marketing commercial environment in the US and the inevitability of rebates in this situation. The judge held further that the objective intention in this situation would be to regard Cycle's "gross income" as the effective income it received, which was to exclude rebates (as they never would have been received given the commercial context). The judge also makes reference to the accounting treatment of rebates which refers to revenue as the gross inflows of economic benefits received and receivable, excluding sums collected on behalf of third parties. This accounting treatment was how Cycle had treated the rebates in its accounts. Accordingly, the judgment held that Cycle was permitted to deduct the rebates from the "Relevant Revenues" in order to calculate the royalty payment.
This case illustrates the importance of precise drafting in commercial contracts to avoid confusion about what should and should not be included in the bucket of monies from which royalties are calculated.