Restraint of Trade

Restraint of Trade – Quantum Advisory Ltd

In Quantum Advisory Ltd v Quantum Actuarial LLP [2020] EWHC 1072 (Comm), the High Court considered whether the restraint of trade doctrine applied in a services agreement entered into in connection with a restructuring and joint venture. The court decided that it did not.

What is a restraint of trade clause?

The purpose of a restraint of trade clause is to restrict the freedom of a business or individual to pursue their trade with the effect of limiting competition.

The case Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 serves as an illustrative example.

Thorsten Nordenfelt, a manufacturer specialising in armaments, had sold his business to Hiram Stevens Maxim for £200,000. They had agreed that Nordenfelt ‘would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way for a period of 25 years'.

The House of Lords held that the restraint was reasonable in the interests of the parties. They placed emphasis on the £200,000 that Thomas Nordenfeldt had received as full value for his sale.

The restraint of trade doctrine

The restraint of trade doctrine exists to protect a party to a contract that is subject to a restraint of trade clause i.e. the party who has been restrained in their trade by the contract. Therefore, when the doctrine applies, the restraint of trade clause in question will be invalid. The doctrine states that a restraint of trade clause will be invalid unless it is:

  1. Designed to protect a legitimate business interest.
  2. No wider than reasonably necessary to protect that interest.
  3. Not contrary to the public interest.

How does the restraint of trade doctrine apply?

There is a line between contracts in restraint of trade, within the meaning of the doctrine, and ordinary contracts that merely regulate the commercial dealings of the parties. The courts will consider, first, if the contract in question is in restraint of trade and, secondly, whether in all the circumstances sufficient grounds exist for excluding the contract from the application of the doctrine. The recent case of Quantum Advisory Ltd v Quantum Actuarial LLP [2020] EWHC 1072 (Comm) allowed a judge to explore both of these questions in depth.

Quantum Advisory Ltd v Quantum Actuarial LLP [2020] EWHC 1072 (Comm)

Facts

In 2004, a company called Quantum (Old Quad) entered into a joint venture with Robert Davies (RD) and others. A new company (RDS) was set up to carry on a similar business with different clients. The single largest shareholder and the MD of Old Quad was Martin Coombes (MC). The principal shareholders in RDS were Old Quad and RD. It was intended that after an initial three-year period there would be a merger of the businesses of Old Quad and RDS into a single entity.

By 2007 however, the interests and ambitions of those involved had begun to diverge. In particular, while MC wanted to diversify, the other directors and shareholders wanted to focus on developing the existing business. For this and other reasons, a restructuring of the businesses became necessary. One problem this presented was that MC's shareholding in Old Quad was such as to make it unaffordable for the other parties to buy him out. It was also felt that, regardless of affordability, it would be very difficult to fix a price for any buy-out.

The restructuring

A way of getting round these problems was devised, by which:

  • The businesses of Old Quad and RPS would be carried on by a new entity (the LLP).
  • A company wholly-owned by MC (New Quad) would buy the entire issued share capital of Old Quad and RPS. The businesses and assets of those companies would be transferred to New Quad subject to outstanding liabilities.

The terms of the restructuring were documented by way of an agreement dated 1 November 2007 entered into between Old Quad and the LLP (Services Agreement). Among other things, the Services Agreement:

  • Contained covenants on the LLP's part (clause 2.2) to not during the course of the Services Agreement or for a period of 12 months after its expiration or termination directly or indirectly:
    • solicit or entice away (or attempt to solicit or entice away) any Client in connection with any Services;
    • obtain instructions for any Services from any of the Clients or undertake any Services for any of the Clients; or
    • undertake any Services in relation to either the Pipeline Business or any work introduced by any of the Introducers during the Extended Period, without first having referred such matters to Old Quad, other than pursuant to the provisions of the agreement.
  • Contained acknowledgments to the effect that:
    • The provisions of clause 2.2 were no more extensive than was reasonable to protect the interests of Old Quad.
    • Each of the restrictions in clause 2.2 was a separate obligation considered reasonable by the parties (each of them having taken, if required, separate legal advice) in all the circumstances as necessary to protect the legitimate interests of the other party (clause 2.6).

Business affairs prior to litigation

New Quad and the LLP conducted their affairs according to the Services Agreement without any real difficulty for a number of years. Increasingly, however, the LLP became dissatisfied with the terms of the Services Agreement. The LLP sought to contend that the restraints in the covenants in clause 2.2 amounted to an unreasonable restraint of trade. Specifically, it complained about the duration of the restraints in circumstances in which the LLP had very limited ability to extricate itself from the Services Agreement before expiration. The LLP did not otherwise complain about the duration of the Services Agreement or the nature of the covenants themselves.

That led to New Quad commencing proceedings, seeking a declaration that the Services Agreement was binding on the parties and an injunction to restrain the LLP from acting in breach.

Decision

The judge concluded that:

  • The doctrine of restraint of trade did not apply to the restraints and therefore the restraint of trade clauses were legally enforceable.
  • If the doctrine of restraint of trade had applied to the restraints, he would have found that they satisfied the requirement of reasonableness.

Did the restraint of trade doctrine apply to the restraints?

In concluding that the doctrine did not apply to the restraints, the judge was at pains to stress that the Services Agreement needed to be considered on its own terms and in its own circumstances. It was a bespoke agreement, fashioned to address the competing needs and interests of a group of professional people. In his opinion the following considerations weighed against the application of the doctrine:

  • The fact that the LLP had been brought into existence for the purpose of the restructuring that was effected via the Services Agreement. It had no prior being or business and no other rationale. While it was true to say that its trade was restrained by the Services Agreement, this argument lacked the kind of traction normally found in restraint of trade cases. In a sense, the Services Agreement was the essential condition of the LLP's ability to carry on business at all. It was not a restraint of trade but a means of providing the opportunity to trade.
  • In this light, to attempt to place the covenants in clause 2.2 of the Services Agreement within the scope of the restraint of trade doctrine showed up a degree of incoherence. The judge pointed out that:
    • To view the restraints as potentially justifiable if of shorter duration (a view which counsel for the LLP had at one point expressed) was to divorce them from the wider agreement and so mistake their nature. Their purpose, as MC had phrased it in a witness statement, "was to recognise the legacy/LLP client ownership boundaries".
    • It had originally been proposed that the term of the Services Agreement be ten years. However, the members of the LLP had expressed concern that, if the agreement ended after ten years, the LLP's sustainability would be threatened by the loss of a major part of its business and income so soon after trading had commenced. When MC proposed extending the term of the agreement to 99 years, the LLP agreed.

Would the restraints have been regarded as reasonable?

The following factors were among those that led the judge to conclude that, had the doctrine of restraint of trade applied to the restraints, he would have found that they satisfied the requirement of reasonableness:

  • The fact that the Services Agreement and the restraints were a matter of free agreement between experienced, intelligent, articulate and highly competent business people who were able to look after their own interests and who had expressly agreed that the restraints were reasonable as being necessary to protect the parties' interests.
  • The LLP had not persuaded the judge that the restraints were unreasonable on account of any consideration of public policy.

The judge dismissed the argument based on alleged:

  • Inequality of bargaining power between the parties (and indeed the alleged lack of any formalised negotiation process at all) because this was not supported by the facts. While it was true that the LLP had not received independent legal advice in connection with the Services Agreement, the judge did not regard this as indicating that the parties' free agreement ought to be viewed with particular caution when considering reasonableness. There was no obligation to seek independent legal advice, under clause 2.6 of the Services Agreement or otherwise.

Context is essential

Clearly this is a decision that turned on the facts. Since most reported restraint of trade cases in the corporate arena arise in relation to private M&A it presents a rare opportunity to see how the courts construe the restraint of trade doctrine in a different context. The decision is a reminder that not all restrictive covenants are subject to the restraint of trade doctrine and the specific business context is crucial to such a ruling.

If you have any questions about restraint of trade clauses or about contract law more generally please contact Neil Williamson.


Limiting Liability

Limiting Liability Under a Contract

Limiting liability under a contract is a common thing for suppliers or sellers to want to do but limitation of liability clauses are often drafted without much thought. A strong commercial awareness of the position of each party is essential when deciding how best to deal with liability issues.

Limiting liability – why bother?

Every commercial transaction carries a risk of liability. Performance can bring the parties into contact with each other, their staff, sub-contractors, suppliers, customers, associates, visitors and the public, in ways that could give rise to all sorts of legal liability: for breach of contract, negligence, misrepresentation, infringement of rights to physical or intellectual property, breach of statutory duty, regulatory offences, defamation and more. Liability may be incurred without fault, and through the acts of others.

In the absence of a limitation clause, there is no financial limit on the damages a counterparty can recover. There are practical limits, and legal limits under the general law of damages. Beyond these, no limits are normally implied. A party wishing to reduce its exposure therefore needs to be limiting its liability through express limitation of liability wording.

Should a customer ever propose a limitation clause?

Suppliers are normally the ones that are keen to be limiting liability; customers less so. Reasons why the customer may propose a draft limitation clause are:

  • The supplier is likely to insist on a limitation clause. By including one in its first draft the customer can set the parameters for negotiation, rather than allowing the supplier to insert its standard clause.
  • The customer can propose losses that are recoverable. For reasons why the supplier should consider accepting identified, capped losses.
  • A customer may want to limit its own liability for breach, if it has contractual duties other than payment. For example, a contract may require the customer to co-operate with the supplier to enable the supplier to perform.

Identify the risks

Limiting liability effectively requires a lawyer to review the risks in the transaction with his or her commercial colleagues or client. Even if the commercial client has already negotiated limits on liability, the lawyer should understand the thinking behind it. The lawyer can then give better advice and draft the clause against the same background of commercial purpose the courts will use to interpret it.

Common risks to consider

  • Insolvency of a party. How financially robust is the counterparty?
  • Change of control. A party's reorganisation or change of control could affect performance, at worst leaving the other party with a claim against a defunct or penniless entity.
  • Breach of this contract. How likely is a default by your client or the counterparty?
  • Third party rights. Does the contract create enforceable third party rights, exposing one party to claims by the other party's affiliates?
  • Breach of other contracts. Are there contracts with others, that might be affected by breach of the contract under negotiation?
  • Misrepresentation. Each party needs to consider how reliable is the information exchanged in the negotiation.
  • Non-contractual liability to the other party. What other liability might one party incur to the other?
  • Other liabilities. Will this transaction expose a party to non-contractual claims by end users, visitors or the public?
  • Contribution claims. In a multi-party transaction, each party should consider its position in relation to the others.
  • Vicarious liability. What acts of other people (staff, agents, sub-contractors) might a party be liable for?
  • Economic risk. What changes in prices, exchange rates, wages or other factors might affect the profitability of the contract?
  • Regulatory risk. Is there a risk that a default might put either party in breach of regulations, leading to regulatory action and penalties?
  • Tax. Is there a risk that the arrangement may be viewed in a way that creates unwelcome tax consequences for a party?

Consider other ways to minimise the risks

Here are some practical commercial actions that may help reduce some identified risks:

  • Backup. Identify alternative sources and consider backup arrangements to deal with them if the preferred contractor fails.
  • Research. Take up references, do credit checks and other research.
  • Third-party guarantees. Require a third party (such as a parent company) to guarantee payment or performance. Consider requesting a letter of credit to ensure payment.
  • Quality control. Review customer feedback and update the product, procedures or customer service to improve customer satisfaction and reduce complaints and disputes.
  • Notices and disclaimers. Use notices and disclaimers on products and in marketing material to reduce the risk of liability to non-parties (for example, for negligence or for breach of onward sale conditions).
  • Product documentation. Review product descriptions and instructions for use.
  • Marketing and advertising. Review any marketing and advertising material to ensure that it does not make any unsupported claims about the products.
  • Compliance. If you have identified a risk that performance of the contract may run into regulatory or tax problems, consider dealing directly with the regulatory and tax authorities to reduce those risks.
  • A separate entity. Use a separate legal entity, with limited liability, to enter the contract.

Limiting liability without a limitation clause

There are other possible drafting techniques to consider, in addition to inserting the usual limitation clause. Some of them are listed here. Because these terms can, in practice, reduce the risk of liability to a counterparty, they are often subject to the same common law and statutory controls as limitation clauses

  • Limit liability for misrepresentation. Limits on liability and remedies for misrepresentation often appear in a clause headed "entire agreement", rather than "limits on liability".
  • Redefine your obligations. Limit the content of duties. Keep them specific and identifiable. Make them conditional on performance by the counterparty.
  • Limit rights and duties in time. Limit a buyer's time to inspect or accept goods or services. Set an expiry date on continuing duties which may survive termination, such as duties of confidentiality and indemnities.
  • Restrict implied terms. Some duties implied into contracts by statute may be limited by express wording.
  • Use risk allocation clauses. These clauses allocate risk between the parties, regardless of fault. For example, a clause may allocate a risk to the party who is best able to insure against it.
  • Use a net contribution clause. This is the usual solution to the risk of contribution claims by other participants in a multi-party project.
  • Change the payment terms. Introduce a deposit, a retention, instalments, interest, set-off and retention of title provisions, to reduce the risk of non-payment.
  • Add a force majeure clause. This could suspend or, eventually, allow you to end your obligations if performance is prevented by a cause beyond your control.
  • Add termination rights. Add a right to terminate for cause (including change of control and threats to solvency) or for convenience.
  • Take indemnities. Ask the counterparty to indemnify you against potential regulatory liabilities, tax, or third party claims.
  • Impose preconditions to claims. Spell out circumstances in which you will not accept liability, such as attempts at do-it-yourself repairs, use of the product contrary to a clear recommendation, and defects caused by compliance with the buyer's own specification.
  • Set time limits on claims. Agree time limits for notifying claims, or to begin litigation.
  • Agree defined remedies. Defined remedies could include repair, replacement, credit against a future purchase or liquidated damages. A defined remedy may be cheaper than damages and can reduce the scope for debate if a claim arises.
  • Agree the contract provides an adequate remedy for breach. This is an indirect and uncertain way to limit recourse to uncapped remedies such as an order to perform the contract.
  • Fix contractual interest. Statutory interest at 8% or more is often payable on the price of goods and services under the Late Payment of Commercial Debts (Interest) Act 1998. A contract term can replace this with contractual interest at a lower (but still substantial) rate.
  • Provide for conclusive evidence. The parties may agree that one of them, or an independent expert, can certify matters which neither can then dispute. For example, an inspector's certificate of quality may be conclusive evidence of the quality of goods delivered. Or a lender may certify (conclusively) the amount of interest due. This can eliminate some points of dispute.
  • Call for insurance. The counterparty can be contractually required to obtain appropriate insurance.
  • Exclude third party rights. A contract cannot bind a non-party. It is therefore pointless in most cases to try limiting third party rights or claims. The exception is third party rights created by the contract.

Limiting liability with a limitation clause cap

When considering a limitation clause it is sensible to introduce a financial cap on liability, or different caps for different types of loss. The supplier will want to ensure that the cap reflects the value it will get from the transaction.

A common starting-point for negotiations is the contract price, if there is one, or an estimate of the total contract value, or a percentage of the contract value (we have seen from 25% to 150%), or the limit of the supplier's insurance.

The cap should not be so low as to risk unenforceability, at least if the UCTA reasonableness test applies. UCTA reasonableness depends on the effect of the clause as a whole, considering all the circumstances of the transaction. In some cases, a refund of sums paid was found acceptable, but this may not always be so. A cap that allows the customer to recover sums paid plus a sum to reflect its other losses is more likely to be enforceable.

The cap will be influenced by market practice: customers do review the limits on liability when comparing suppliers. The figure chosen may sometimes appear arbitrary. One way to justify an apparently arbitrary figure may be to offer alternative prices, with and without the cap. The business client's policies and commercial aims will be as important as the lawyers' advice in fixing the cap. Suppliers often agree to a limit which is not their ideal, to win the business and get onto the customer's supplier list.

Negotiation

Having a strong understanding of the commercial aspects of a contract and how best to translate this into the legal position (by gaining advice) should help when negotiating limiting liability. It is also important to consider ways of limiting liability without simply adding a limitation clause.

If you have any questions about limiting liability or about contract law more generally please contact Neil Williamson.


Excluding liability under a contract

Excluding Liability Under A Contract

Excluding liability under a contract is common practice for suppliers or sellers. Most contracts have a limitation clause which caps certain liabilities at an amount often related to the value of the contract. A party can also use a clause to accept certain liabilities or exclude them altogether.

Excluding liability, cap or accept?

A limitation clause should set out:

  • Risks each party accepts without limit. A party may accept unlimited liability for losses within its exclusive control, sometimes also giving an indemnity against those losses. It is also common for a limitation clause to state that the parties are not attempting to limit liabilities that cannot legally be limited.
  • Risks each party accepts with a cap. The parties may list liabilities that are accepted subject to a cap. They may also impose a total cap on liability.
  • Risks each party wholly excludes. For example, a supplier might list specific losses. A customer might prefer not to propose that any risks should be completely excluded.

Excluding liability for everything is not possible

Commercial colleagues or clients are likely to ask the drafter of a limitation clause “How much liability can we exclude? Can we exclude all liability?”. The answer is No, and the drafter will need to be able to explain why:

  • You cannot exclude liability for your own dishonesty, even where UCTA does not apply.
  • Unfair Contract Terms Act (UCTA). Where UCTA applies, there are more liabilities you cannot exclude, and others you can limit only where reasonable. A blanket exclusion of all liability would have little chance of passing this test.
  • Interpretation risk. A clause should not be drafted as excluding liability for a party’s breach of all its contractual duties or leave a party without any meaningful remedy for breach. A clause that purports to do this might be void, or invalidate the contract, or be interpreted restrictively.
  • A contract that seeks to exclude all liability may take longer to negotiate and have a negative impact on goodwill and the parties' relationship.

So, a draconian clause may look tough, but a more moderate position is easier to negotiate and more resistant to challenge, as a matter of interpretation as well as reasonableness.

What you might seek to exclude completely

Risks you cannot control

A party may argue that, while it will accept risks it can control, it has to exclude those it cannot, especially those in the other party's control. For example, between principal and overseas agent, only the agent has all the knowledge and ability to comply with local laws, so the agent should accept all the risk of non-compliance.

A licensor might exclude the risk that its product infringes third party patents in some or all territories, on the grounds that it does not have the resources to carry out the necessary infringement checks.

One party might be excluding liability for losses arising from a specified cause within the other's control, or specified types of claim likely to arise from the other's fault. For example, many software suppliers exclude liability for loss of data. Their argument is that the customer should never lose data if it has proper backup systems.

Each party may accept responsibility for its own fault, while perhaps seeking to exclude or limit liability incurred without fault. A party can incur liability without fault under statute (for example, the Bribery Act 2010) or under absolute obligations contained in the contract.

Risks you cannot afford, or that the other party should insure against

A supplier will often seek to exclude certain categories of loss entirely. Its arguments for doing so might include that it is uneconomic for it to carry this risk, it cannot insure for it and/or the other party should properly insure for it.

Excluding liability for indirect and consequential loss

Parties often exclude all "indirect or consequential loss". This is generally an easy win for the supplier in negotiations. However, as currently interpreted by English courts, this exclusion is often ineffective. It does not exclude most losses caused by a breach of contract, including financial losses. But does exclude losses that are, by definition, unusual and often irrecoverable by law.

Other specific risks parties sometimes exclude

It may be commercially acceptable to mirror in the contract the exclusions from the supplier's insurance cover, so that the supplier is not exposed to uninsured losses, if these exclusions are not too widely drafted.

Don't bury the exclusions and limitations

Parties who prefer not to draw attention to their exclusions and limitations must accept a higher risk of unenforceability. A drastic exclusion or limitation clause is easier to enforce if brought expressly to the counterparty's attention during negotiations than if buried in irrelevant or inaccessible parts of the contract. This principle can affect:

Excluding Liability within limits

It is common practice for supply or sale contracts to contain provisions excluding liability. At the same time it is important to note that exclusions should be drafted carefully and taking into account the points mentioned above. Being too aggressive could have negative consequences down the line and in some cases render the whole exclusion clause ineffective.

If you have any questions about excluding liability or about contract law more generally please contact Neil Williamson.


Towergate Financial Commercial Law Firm London

Towergate Financial - Interpretation of Contractual Limitation Period

In Towergate Financial (Group) Ltd & Others v Hopkinson & Others [2020] EWHC 984 (Comm)the High Court considered the correct interpretation of a contractual time limit for notifying indemnity claims under an Share Purchase Agreement (SPA).

Clear words needed for limiting rights

Contractual limitations periods for notifying warranty or indemnity claims under an SPA are a form of exclusion clause. Clear words are required under English law to exclude or limit rights or remedies which arise by operation of law, including the obligation to give effect to a contractual warranty. The Court of Appeal affirmed this principle for commercial as well as other contracts in Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128.

Facts

In August 2008, the claimants (Towergate Financial and others) purchased a financial services firm from the first six of the defendants on terms agreed within an SPA. By one term in particular, those defendants gave the claimants an indemnity against any losses consequent upon claims or complaints against the business arising from mis-sold financial products.

In 2014, the FCA instituted formal section 166 of the Financial Services and Markets Act 2000 reviews to investigate its concerns in relation to enhanced transfer value (ETV) schemes and unregulated collective investment schemes (UCIS) upon which the firm had advised prior to the SPA. As a result of these reviews, Towergate Financial and others were required to make redress payments to customers and estimated their potential liability in the tens of millions. In July 2015, the claimants served on the relevant defendants a notice of their intention to rely on the said indemnity, as was required by the SPA.

Litigation

The question for the court, to be determined by way of preliminary issue, was whether or not that notice complied with a condition precedent contained within the notice clause in the SPA. In particular, were the claimants bound by a requirement that notice should be served “as soon as possible” upon learning of any “matter or thing” that might give rise to liability?

The case had already been through the High Court and Court of Appeal on the question of whether or not it had been necessary for the notice to specify the details and circumstances, and an estimate in good faith of the value of the potential indemnity claim, in accordance with the notice clause. Those two courts had determined that there was no such requirement on the wording of the clause: the claimants need only give bare notification of the “matter or thing” (in this case, the section 166 reviews).

The clause

The notice clause was as follows:

6.7 The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to:

6.7.1 the seventh anniversary of the date of this Agreement in the case of any Claim solely in relation to the Taxation Covenant;

6.7.2 the date two years from the Completion Date in the case of any other Claim; and

6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.

Towergate Financial argument

The claimants relied upon the proposition that a condition precedent must be clear and unambiguous if it is to be enforceable, citing Zurich v Maccaferri and Impact Funding v AIG. In this respect, they pointed to a number of problems with the clause:

  • Those parties to the SPA giving the indemnities were not the same as those giving warranties. It follows that the reference to giving notice to “all” the warrantors was illogical for an indemnity claim. Therefore, how could the words “as soon as possible”, which followed that reference, apply to indemnity claims?
  • The words “prior to” at the end of the main clause conflicted with “on or before” in the sub clause, making a “nonsense” of the meaning. This was another pointer that “as soon as possible” could not apply to indemnity claims.
  • The words “as soon as possible” were surplusage and commercially unnecessary, the real limit being seven years (in reliance on AIG Europe v Faraday).
  • The words “as soon as possible” were fundamentally unclear in this context. What was the trigger to start time running? Once it did, how long did it permit?

Towergate Financial Judgment

Mrs Justice Cockerill DBE, in a carefully reasoned and detailed judgment, took a robust approach to Towergate Financial’s objections. She accepted that the clause had its “imperfections” but had “no difficulty in concluding” that there was an enforceable condition precedent requiring notice to be given as soon as possible. She stated, at paragraph 72:

“… while the… clause is not perfect, it is – in real terms – perfectly clear. There are a few issues with it, but they are ones that any sensible reader can resolve without difficulty. It is not ambiguous.”

There was nothing difficult about the concept of the words “as soon as possible”, and the previous High Court and Court of Appeal judges had had no problem identifying the trigger point as any matter or thing that “may give rise to liability”. That was a common concept in insurance contracts and could be understood by taking a practical view. The judge thereby made the point that even if a clause is imperfect, if it has only one sensible meaning then, no matter its flaws, it is tolerably clear.

Having therefore determined that “as soon as possible” meant “as soon as possible” and imposed a condition precedent upon the claimants, the judge had no trouble finding that, as a matter of fact, notice was plainly late, coming 17 months after inception of the section 166 reviews. As a consequence, Towergate Financial’s claim under the indemnity failed.

Buyers beware

This decision emphasises the importance of the provisions that regulate when notice of claims must be given, and the considerable scope for disputes if there is any ambiguity in the drafting of those provisions. The case also highlights the potential pitfalls, particularly for a buyer, associated with notice of claims provisions that take effect as a condition precedent to liability and which operate by reference to a trigger that is subjective, or otherwise open to interpretation, such as a requirement to provide notice "as soon as possible". In the interests of certainty, and to preserve the usual commercial rationale of a limitation of this type, buyers would be well advised to avoid a limitation of liability that is drafted in such terms.

If you have any questions on limitation periods or on any of the points above for our contract lawyers or our dispute resolution lawyers please contact us.


Big Data

Big Data – AI and Machine Learning

The use of computers and the internet has allowed unprecedented amounts of data to be collected and used for a variety of ends. Big data technology represents the most advanced and sizeable use of this new asset. The size and extent of such operations come up against a number of regulatory barriers. Most notably the General Data Protection Regulation (EU) 2016/679 (GDPR).

What is Big Data?

Big data is the harnessing, processing and analysis of digital data in huge and ever-increasing volume, variety and velocity. It has quickly risen up the corporate agenda as organisations appreciate that they can gain advantage through valuable insights about their customers and users through the techniques that are rapidly developing in the data world.

Much big data (for example, climate and weather data) is not personal data. Personal data relates to an identifiable living individual. For data that is or could be personal data, data protection legislation in particular the GDPR must be carefully considered.

Brexit

During the transition period (ends 31 December 2020 unless extended) and after organisations should, as the ICO has noted, continue data protection compliance as usual. The key principles, rights and obligations will remain the same and organisations already complying with the GDPR should be in a good position to comply with the post-Brexit data protection regime.

Big Data Analytics, Artificial Intelligence and Machine Learning

Being able to use big data is critical to the development of Artificial Intelligence (AI) and machine learning. AI is the ability of a computer to perform tasks commonly associated with human beings. In particular, AI can cope with, and to a large extent is predicated on, the analysis of huge amounts of data in its varying shapes, sizes and forms.

Machine learning is a set of techniques that allows computers to ‘think’ by creating mathematical algorithms based on accumulated data.

Big data, AI and machine learning are linked as described by the ICO:

“In summary, big data can be thought of as an asset that is difficult to exploit. AI can be seen as a key to unlocking the value of big data; and machine learning is one of the technical mechanisms that underpins and facilitates AI. The combination of all three concepts can be called "big data analytics”. (Paragraph 11 of ICO: Big data and data protection 2017.)

Big data analytics differs from traditional data processing in the following ways:

  • It uses complex algorithms for processing data. This usually involves a “discovery” phase to find relevant correlations (which can be a form of machine learning) so that algorithms can be created.
  • There is limited transparency on how these algorithms work and how data is processed. As vast amounts of data are processed through massive networks, a “black box” effect is created that makes it very difficult to understand the reasons for decisions made by the algorithms.
  • There is a tendency to collect “all the data” as it is more easily available rather than limiting the analytics to random samples or statistically representative samples.
  • Often data is re-used for a different purpose for which it was originally collected, often because it is obtained from third parties.
  • It usually involves data from new sources such as the Internet of Things (IoT) and “observed” data that has been generated automatically, for example by tracking online behaviour rather than data provided by individuals. In addition, new “derived” or “inferred” data produced by the algorithms is used further in the analytics.

Big Data and Data protection

Managing compliance with the GDPR will play a large part in big data management projects involving data harvested from the expanding range of available digital sources. Many organisations will already have an established data protection governance structure and policy and compliance framework in place and these can be helpful as pathfinders towards structured data governance.

Controller or processor?

Under Article 4(7) of the GDPR, a person who determines “the purposes and means” of processing personal data is a controller and under Article 4(8), a processor just processes personal data on behalf of the controller.

Correctly assessing whether an organisation is a controller or a processor in the context of the collection of massive amounts of data is therefore critical to the GDPR compliant structuring of the relationship and to allocating risk and responsibility.

However, the borderline between controller and processor can be fuzzy in practice. Where it lies in the AI context was considered for the first time in the UK in the ICO’s July 2017 decision on an agreement between the Royal Free Hospital and Google DeepMind. Under the agreement, DeepMind used the UK’s standard, publicly available acute kidney injury (AKI) algorithm to process personal data of 1.6m patients in order to test the clinical safety of Streams, an AKI application that the hospital was developing. The ICO ruled that the hospital had failed to comply with data protection law and, as part of the remediation required by the ICO, the hospital commissioned law firm Linklaters to audit the system. The hospital published the audit report in May 2018, which found (at paragraph 20.7) that the agreement had properly characterised DeepMind as a processor not a controller.

Things important to this characterisation were that the algorithm was simplistic and its use had been mandated by the NHS. Understanding whether an organisation is a processor or controller is a complex issue and seeking advice on the matter may be crucial to understand potential liabilities for those using big data.

Personal data

In the context of big data, it is worth considering whether personal data can be fully anonymised, in which case taking it outside data protection requirements. This is noted in Recital 26 of the GDPR which says that:

"the principles of data protection should therefore not apply to anonymous information, namely information which does not relate to an identified or identifiable natural person or to personal data rendered anonymous in such a manner that the data subject is not or no longer identifiable".

However, personal data which has been pseudonymised, in other words could still identify an individual in conjunction with additional information, is still classed as personal data.

Profiling

The GDPR includes a definition of profiling that is relevant to the processing of big data. Profiling is defined as any form of automated processing of personal data used to evaluate certain personal aspects relating to a natural person, in particular to analyse or predict the following: performance at work; economic situation; health; personal preferences; interests; reliability; behaviour; location; movements. (Article 4(4), GDPR.)

The GDPR includes data subject rights in relation to automated decision making, including profiling. The fact that profiling is taking place must be disclosed to the individual, together with information about the logic involved, as well as the significance and the envisaged consequences for such processing.

Individuals have the right not to be subject to a decision based solely on automated processing (which includes profiling), which produces legal effects concerning them or similarly significantly affects them (Article 22(1), GDPR). However, this right will not apply in certain cases, for example if the individual has given explicit consent, although suitable measures must be implemented to protect the data subjects.

Fair processing

In the ICO Big Data Paper 2017, the ICO emphasises the importance of fairness, transparency and meeting the data subject’s reasonable expectations in data processing. It states that transparency about how the data is used will be an important element when assessing compliance. It also highlights the need to consider the effect of the processing on the individuals concerned as well as communities and societal groups concerned. Similarly, the EDPS 2015 opinion stresses that organisations must be more transparent about how they process data, afford users a higher degree of control over how their data is used, design user friendly data protection into their products and services and become more accountable for what they do.

Transparency

As well as the general requirement for transparency in Article 4(1)(a), the GDPR includes specific obligations on controllers to provide data subjects with certain prescribed information (typically done in the form of a privacy notice) (Articles 13 and 14, GDPR).

The ICO Big Data Paper 2017 notes that the complexity and opacity of data analytics can lead to mistrust and potentially be a barrier to data sharing, particularly in the public sector. In the private sector, it can lead to reduced competitiveness from lack of consumer trust. Therefore privacy notices are a key tool in providing transparency in the data context. In relation to privacy notices, the Paper suggests using innovative approaches such as videos, cartoons, icons and just-in-time notifications, as well as a combination of approaches to make complex information easier to understand.

An introduction

This blog is no more than an introduction and summary of some of the legal issues raised by big data. In many ways the GDPR was created in response to such activity and therefore the extent of its applicability to the topic is unsurprising. Any organisation looking to undertake such a project should be aware of regulations in a way that allows compliance to be built into an operating system.

If you have any questions on data protection law or on any of the issues raised in this article please get in touch with one of our data protection lawyers.