Commercial and tech update - Summer 2019

Government proposes measures for tackling late payment

Late payment and long payment terms can cause significant harm to businesses. It affects cash-flow, the ability to pay suppliers and the ability to invest in new employees. This is detrimental to all businesses but is felt most acutely in small businesses. There are a number of measures presently in place to tackle late payment, including the ability to charge interest on late payments, the Prompt Payment Code and the creation of the Small Business Commissioner, who supports small businesses in resolving payment disputes with larger businesses. 

In October 2018, the Department for Business, Energy & Industrial Strategy sought to gather information on how to encourage a prompt and responsible payment culture for small businesses. The Government has now published its response which calls for tougher measures to be imposed to prevent poor payment practices. The Government proposals include:

• Strengthening the role of the Small Business Commissioner. The Government will consult on giving new powers to the Small Business Commissioner to:
  • impose fines on large businesses who do not comply with information requests; and
  • impose fines and binding payment plans where payment does not take place.
• Increasing board level responsibility. The board shall have increasing responsibility for payment practices and the Government is looking to implement the Chancellor's Spring Statement announcement that large companies' audit committees will be required to report on their payment practices in their annual reports.
• The launch of a Business Basics Fund competition of up to £1 million. The fund is designed to encourage businesses to use technology to simplify invoicing and payment practices, thereby reducing the time businesses spend chasing payments.
• Government leadership. From 1 September 2019, any supplier who bids for a Government contract above £5 million per annum will be expected to pay 95 per cent. of invoices within 60 days.

Banking on good systems

Raphaels Bank (the Bank) has received a significant fine for outsourcing failings following an IT outage on Christmas Eve in 2015, with the FCA and the PRA issuing a combined fine of £1.89 million for failures to comply with Principles 1 and 2 and associated rules of SYSC 8 of the FCA Handbook, and Fundamental Rules 2, 5 and 6 of the PRA’s Rulebook.  

A technology incident at one of the Bank’s card processors caused a complete failure of the authorisation and processing services for over 8 hours, leaving thousands of the Bank’s customers unable to use their prepaid cards and charge cards on Christmas Eve. Seasonal workers, who depended on the cards to receive their wages, were also affected.

In a joint statement, the FCA and PRA explained that the Bank’s systems and controls supporting the oversight and governance of its outsourcing arrangements were inadequate, and exposed customers to unnecessary and avoidable harm and inconvenience. In particular, they criticised the Bank for its failure to understand and assess the business continuity and disaster recovery arrangements of its outsourced service providers through due diligence and ongoing monitoring of such arrangements, nor did they understand the impact that a disruptive event would have on their operational resilience. 

Unfortunately for the Bank, this is not the first time that they have been subject to enforcement action from the PRA as a result of outsourcing failures and this aggravated the level of fine they received. In 2015, the Bank was fined £1.3 million over improper money transfers to its outsourced ATM finance function, with their outsourcer’s employees transferring funds from the Bank to the outsourcer in order to deal with their cash flow issues. The PRA cited that a failure to implement adequate controls meant that the Bank did not understand its capital position or the risks that it was exposed to.

Operational resilience in the financial system remains a key focus area for the FCA and the PRA, which is unsurprising given the potential harm that a disruption to the system could inflict on consumers and market participants alike. Rather than acting as a warning to avoid outsourcing altogether, this should serve as a reminder for firms to ensure they have adequate oversight and controls in place to manage and monitor their outsourced service providers and the business continuity and disaster recovery plans they have in place. The FCA and PRA are expected to publish a joint consultation paper on the topic later this year.

For a more detailed account of the above case, please see our report here.

New Ofcom rules enable switching provider with a text

Ofcom has introduced new rules with effect from 1 July 2019 enabling consumers to change their mobile network via a free texting process. The rule was introduced following research that identified difficulties cancelling a previous service was the largest obstacle faced by customers looking to change mobile providers. The new “text-to-switch” process introduces several options:

• By texting “PAC” to 65075 customers can keep their existing number when switching. After sending the text, the customer’s existing provider will provide the required PAC within one minute (which will be valid for 30 days). The provider’s reply is also required to include information regarding early termination charges or the customer’s pay-as-you-go credit balance. The customer can then provide the PAC code to their new provider who must arrange for the switch to be completed within one business day.
• By texting “STAC” to 75075 customers can get a new mobile number – this acts similarly to the PAC code except that the customer will not retain their number.
• By texting “INFO” to 85075 customers can find out whether they are still within the term of their contract and if an early termination charge would apply.

The rules also prohibit mobile providers from charging customers for notice periods after the switch date which will avoid customers having to pay “double payments” to both their old and new mobile providers at the same time.

Ofcom implemented these rules as part of its wider programme to ensure Fairness for Customers which involves (i) requiring companies to tell customers when their contract expires and explain the best deal available to them; (ii) requiring broadband providers to give customers clear information on the speeds they will get prior to signing up to a contract; (iii) the “Boost Your Broadband” campaign to help consumers save and get faster broadband; and (iv) increase transparency regarding which telecom and pay TV providers provide the best and worst customer service.

Calculated agents

In Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd & Ors [2019], the High Court considered three key issues: 

1. whether heads of terms (“HoTs”) had contractual effect, notwithstanding that the HoTs clearly anticipated that the parties would subsequently enter into a formal contract;
2. whether the agent was entitled to compensation under the Commercial Agents (Council Directive) Regulations 1993/3053 (the “Regulations”), notwithstanding the fact that the principal had terminated the contract as a result of the agent’s breach of contract; and
3. quantification of compensation under the Regulations.

The claim was brought by Green Deal Marketing Southern Limited ("GDM"), an energy mediator which connected energy providers with consumers, against Economy Energy Trading Ltd ("EET"), an electricity and gas seller. GDM and EET had entered into a partnership agreement which, according to GDM was then superseded by a HoTs. EET sought to terminate the agreement on the grounds that GDM’s team had been mis-selling, which constituted a breach of the agreement. 

GDM claimed that EET’s attempt to terminate the agreement amounted to a repudiatory breach and sought damages for breach of contract and compensation under the Regulations. 

The court found that, although the HoTs were intended to be superseded by a complete and formal contract, they themselves were found to be an effective agreement. This is a useful reminder that parties will not be able to “rely on supposed incompleteness to defeat…contractual effect”. 

GDM sought compensation, as agent, under the Regulations in addition to damages for breach of contract by EET. In awarding GDM £1,049,600 as compensation under the Regulations, the court found that if a principal terminates the contract because of the agent’s breach of contract, such breach would need to be repudiatory in order for an agent’s compensation to be excluded under the Regulations. In this case, EET’s attempt to terminate the agreement was found to be a repudiatory breach. However, although the court agreed with GDM that compensation under the Regulations is a distinct remedy from common law damages, in this case, it was found that common law damages plus compensation would have led to double recovery.

The judgment sets out various experts’ methods of valuing the compensation due to GDM under the Regulations. The court referred back to the underlying theory relating to compensation under the Regulations – that “the agent is regarded as having a share in the goodwill in the principal’s business which he helped to create. The agent is entitled to compensation for the loss of his interest in the goodwill, which the principal retains after termination of the agency.” Ultimately, EET’s expert valuation was accepted which was based on GDM’s EBITDA multiplied by a discounted multiplier which took into account various factors, including that EET was GDM’s sole customer and that there were various regulatory pressures on GDM’s business which affected its valuation.