Insights for In-house Counsel - October 2021

Post-Brexit immigration

Following the end of the Brexit transition period, EU free movement rules no longer apply to UK-EU travel. As a result, individuals travelling on business from the UK to the EU (or vice versa) need to consider whether the nature of their travel is such that they require a visa or not. Our interactive map sets out a high-level summary of the business travel rules for each EU jurisdiction.

Employers hiring EEA and Swiss nationals in the UK must also now check the individuals' right to work in the UK in accordance with new rules which came into force on 1 July 2021. Broadly, the employer must check the individual has status under the EU Settlement Scheme or has a visa under the new points-based immigration system. See our briefing on the Post-Brexit immigration regime for details of work visas under the new system.

Review of retained EU law

The Government has announced that it plans to review the status of retained EU law ("REUL") (see pages 12-13 of this document). There are two aspects to this:

• Retained EU case law: the Government is considering whether to extend the power to depart from retained EU case law to all UK courts. The current position is broadly that only CJEU judgments up to 31 December 2020 remain binding on the UK courts, but the Supreme Court and the Court of Appeal (together with courts at the same level as the CA) may decide to diverge from it. In doing so the Government is revisiting the decision reached only last year that the benefits of extending the right to diverge to lower courts would be outweighed by the negative impact on legal certainty.
  
  
• Retained EU legislation: currently, REUL takes precedence, in the event of a conflict, over other UK legislation on the same subject matter. This was intended to promote certainty. However, the Government is revisiting the concept of "supremacy of EU law" in respect of REUL, considering how to allow REUL to be challenged and potentially, changes to the substantive content of REUL. It may also look to re-designate certain pieces of REUL to indicate whether they should be regarded as "primary" or "secondary" legislation in terms of the UK statute book.
  
  

Controls on EU imports

Although the Government has recently announced the postponement of certain border requirements until the middle of 2022, it is currently sticking to its plans to require full customs declarations on goods imported from the EU as of 1 January 2022. This change has the potential to further disrupt UK supply chains (which are already experiencing material disruption due to a combination of factors, including COVID and Brexit). Our briefing explains what is changing and what you can do to prepare.

EU withholds consent to Lugano Convention

Since the Brexit transition period ended on 31 December 2020, there has been no comprehensive reciprocal regime in place to determine how the English courts and EU member state courts should allocate jurisdiction between themselves over civil and commercial cases with a cross-border element. Equally, there has been no comprehensive regime in place to determine when English courts should recognise and enforce civil and commercial judgments of EU member state courts, and vice versa. Many practitioners had hoped that this situation would be resolved by the UK re-joining the 2007 Lugano Convention (the "Lugano Convention"), an international agreement which currently applies between EU member states and certain ETFA member states, and which governs these areas. 

However, in a move which some will see as political, in May 2021 the European Commission recommended that the UK's application to join the Lugano Convention should be rejected, on the basis that Lugano is intended to support the Single Market of which the UK is no longer a part. The Commission subsequently deposited a Note Verbale in June 2021 with the Swiss Federal Council in its capacity as Depositary of the Lugano Convention, confirming that the EU "is not in a position to give its consent to invite the United Kingdom to accede to the Lugano Convention". Although the European Council (i.e. the EU member states themselves) could ignore the Commission's recommendation and approve the UK's application, the Note Verbale suggests that it has no intention of doing so. 

For now, at least, the UK's application to join the Lugano Convention would therefore appear to be dead in the water.

Further Brexit-related developments

• Personal data: In a welcome move, the European Commission has formally approved a data adequacy ruling for the UK, which means that personal data can flow freely from EEA data controllers to businesses based in the UK (see Data Protection).
  
  
• Intellectual property: The Government is consulting on changes to its approach to exhaustion of IP rights (see Intellectual Property).
  
  
• State aid/subsidy control: The Subsidy Control Bill currently before Parliament is intended to provide a domestic state aid regime for the UK following its exit from the EU. It is being introduced partly in order to comply with commitments that the UK made to the EU in the Trade and Cooperation Agreement signed in December 2020. Our briefing explains why it's important and how the new regime is likely to differ from the EU state aid rules. As mentioned in the Competition section below, a new BEIS Committee inquiry, likely to begin in late October 2021, will consider whether the framework set out in the Subsidy Control Bill is fit for purpose.
  
  
• Regulatory reform: The Government has also announced areas it intends to prioritise for regulatory reform following the end of the Brexit transition period (although it should be noted that not all of these reforms are driven primarily by Brexit and some could have been pursued in any event). Our briefing highlights key areas in which the Government is pursuing reform, covering both Brexit and non-Brexit-related initiatives.

The following Beyond Brexit briefings may also be of interest:

• Brexit: has anything got cheaper?
• Where to invest: the geographic impact of Brexit
• Freeports: what, where and when?
• Freeport customs sites: promising opportunity or not worth getting excited about?
• Freeports and planning: benefits and challenges

Greenwashing - CMA guidance and risks for financial institutions 

Draft CMA guidance

To what extent is it permissible to use terms such as "recyclable", "organic" or "sustainably produced" in product marketing?

The Competition and Markets Authority has been looking at potentially misleading claims about the green credentials of consumer products and has published draft guidance setting out a series of key principles which will be helpful in assessing what is permissible. Those principles are:

• claims must be truthful and accurate
  
  
• claims should be clear and unambiguous
  
  
• claims should not omit or hide important information
  
  
• comparisons should be fair and meaningful
  
  
• claims should take into account the full life cycle of the product and
  
  
• claims should be substantiated.

Our briefing provides more information on this draft guidance.

Finance greenwashing

Greenwashing in finance has also been in the spotlight recently, thanks to a high-profile claim against an asset manager. Our briefing discusses how organisations can manage the risks around finance greenwashing, while many are getting to grips with the EU Sustainable Finance Disclosure Regulation and the related Taxonomy Regulation.

Mandatory climate reporting for large UK companies

The Task Force on Climate-related Financial Disclosures, or TCFD, is an international framework for companies to disclose the potential impact of climate change on their business and ways in which they manage and mitigate that impact. The framework is growing in prominence, with a recently published survey suggesting that 45% of asset managers are now reporting under it (a 27% increase on the previous year). The Government has proposed that much of the economy would be covered by mandatory TCFD reporting from 2023, and has published a consultation on the first requirements which will apply to publicly quoted companies, large private companies and limited liability partnerships.

Back in March 2021, the Government said that the requirements for PLCs, large companies and LLPs would apply from 1 January 2022; as no draft legislation or even consultation response has been published at the time of writing, this does not give businesses very much time to prepare.

More details on the proposals can be found in our briefing. The FCA has separately proposed TCFD reporting requirements for asset managers, insurers and FCA-regulated pension providers (read more in our briefing). As reported in the last edition of this newsletter, premium-listed companies are already required to disclose in accordance with TCFD on a "comply or explain" basis.

See the Pensions section below regarding the TCFD obligations on occupational pension schemes, which are in force from 1 October 2021 for the largest schemes and for master trusts.

The evolution of ESG-linked financial incentives

As we emerge from the pandemic, the importance of responsible business and sustainability has never been so clear. From the growing efforts worldwide to avert the climate emergency, to public action on racial injustice, society at large is increasingly focused on confronting a broad range of issues. And, of course, there is growing expectation that investors and corporates will play their part.

The evolving regulatory environment also continues to push ESG issues to the top of the agenda, but increasingly there is emphasis not just on the legal liability and reputational damage that may result from poor ESG performance (which has been a focus of due diligence exercises and corporate governance provisions for some time now) but also the opportunities that strong ESG performance may provide for a business to flourish. There is growing recognition that financial rewards can be gained through embracing the challenges of the future – or put another way, that companies will do well by doing good.

Asset managers are particularly well placed to promote sustainable and responsible practices through active management of their portfolio companies.

In this thought-provoking article, we explore potential ways of using ESG KPIs in incentivisation schemes at the asset level to drive behavioural change. In doing so, we also look at market developments in relation to listed company remuneration packages linked to ESG targets, ESG-linked debt facilities and hedging products and impact fund ESG-linked carried interest structures. We also explore some of the difficulties that may arise when adopting ESG-linked financial targets.

The rise of the B Corp

B Corporations or "B Corps" are businesses that 'meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose'. Being a B Corporation demonstrates a company's commitment to its stakeholders and the environment, both now and over the longer term.

Worldwide there are over 4,000 B Corporations, across 153 industries and 77 countries. An increasing number are publicly traded – admittedly on overseas markets so far but the FT recently reported that the London Stock Exchange is about to get its first listed B Corps.

Given the increasing focus on stakeholder governance and sustainability from investors, employees, customers, governments and regulators, it is not surprising that B Corporations are attracting attention.  By being a B Corporation, businesses can demonstrate they are trying to create a positive impact for their employees, communities and the environment. 

Some large household names and private equity firms already have B Corporation status, including Helios Investment Partners, TowerBrook Capital Partners, Ella's Kitchen, Innocent, Pukka, Bookshop.org and Patagonia (view a full list of all B Corporations). 

Our briefing looks at the pros and cons of B Corps status in more detail.

Global growth in climate change litigation

Climate change litigation is amplifying and, gradually, we are starting to see more cases being brought successfully by climate change activists, both in the form of private law duties and through judicial review regimes. In both the Netherlands and Germany we have seen claims founded on international law and human rights standards brought by activists against private companies and in a ground-breaking Australian case a court found the Minister for the Environment had a duty to protect young people from the effects of climate change.

We are also starting to see attempts to utilise existing financial disclosure regimes to try and pressure corporations into publishing additional ESG-related information that give rise to so-called "greenwashing" allegations. Businesses need to be mindful of these developments in the toolkit of claimant lawyers and carefully consider how developing ESG regulations may lead to unintended litigation risk.

Door opened for value chain litigation

A series of cases have recently been brought in which English Courts have declined to dismiss claims alleging novel duties of care against UK companies for alleged harms connected with their overseas business operations. This builds on a policy decision made by the Supreme Court in Vedanta Resources Plc v Lungowe [2019] UKSC 20 to allow novel cases to progress to trial.  Claimants have leveraged this to bring even more novel claims, with a new focus on so-called "value chain" liability whereby UK-domiciled businesses are said to be legally liable for the acts of an overseas-based supplier or customer.  The collective effect of this growing body of case law is that UK-domiciled defendants face growing litigation risk in respect of alleged harms connected with their global value chains, particularly in relation to business ethics and human rights and environmental practices.  For more on this, see our recent articles on Josiya v BAT and Begum v Maran.

Interestingly this is developing at a time where the EU is looking to essentially introduce similar "value chain" liability regimes via regulation and, taking a different approach, where the US Supreme Court has declined to recognise a similar duty in the US.  These developments, and the fundamental divergences between the EU, UK and US, is something for businesses to take heed of as the ESG agenda matures globally.  For more on these global developments, see our recent summary of the Nestlé decision and EU mHRDD (mandatory Human Rights Due Diligence) regimes.

COP26

Please visit our COP26 Hub for news and views and key announcements from the UN Climate Change Conference 2021 which will be held in Glasgow from 31 October to 12 November 2021.

Pakistan International Airline Corporation v Times Travel (UK) Ltd

In this decision, the Supreme Court has confirmed that the doctrine of "lawful act" economic duress exists in English law and clarified the test for when it will apply.

The doctrine of duress enables a party to rescind a contract that they have been induced to enter into as a result of an illegitimate threat. Over time, the courts have expanded the concept of an illegitimate threat to encompass threats to a person's economic interests (known as "economic duress") as well as physical threats. It has long been established that economic duress can be founded on an unlawful threat to damage a person's economic interests (e.g. a threat to commit a crime, a tort, or a breach of contract).  This is known as "unlawful act economic duress".  It has been less clear whether economic duress can also be founded on a threat to do something which is lawful ("lawful act economic duress").

The Supreme Court confirmed that lawful act economic duress exists and that it has three essential elements: (i) there must be a threat or pressure exerted by the defendant which is illegitimate; (ii) that threat or pressure causes the claimant to enter into a contract; and (iii) the claimant must have no reasonable alternative to giving into the threat or pressure. The court equated the concept of "illegitimacy" here with the concept of "unconscionability" which arises in the context of the equitable doctrine of undue influence. 

Commercial parties will be relieved that the judge made it clear that lawful act economic duress will arise only very rarely in the course of ordinary commercial negotiations, and that it will generally remain open to commercial counterparties to exploit inequalities in bargaining power to extract concessions from one another when negotiating a contract.

For further commentary on this case, we recently published a detailed briefing on the decision.

Joint ventures: sharing the profits

In a dispute between two partners to a joint venture (JV) agreement (Donovan v Grainmarket Asset Management), the Court of Appeal ruled that despite not having performed all of its obligations under the agreement, a JV partner was still entitled to its share of the profits. Our briefing explains what lessons this holds for businesses when drafting and negotiating JV agreements, particularly where the JV partners are acting both as investors and suppliers to the JV.

Defining quality and a reminder on UCTA

A recent dispute over furniture supplied to an upmarket hotel (Phoenix Interior Design v Henley Homes) has highlighted issues over:

• defining the standard of quality required, particularly where there is a subjective aspect e.g. "high quality look or feel"; and
  
  
• the Unfair Contract Terms Act 1977 (the case is a reminder that UCTA can sometimes render a clause invalid even where there is equality of bargaining power between the parties).

Our video series on limiting liability in B2B contracts may also be of interest.

Force majeure

In a case which may be relevant to disputes arising out of COVID-19 or Brexit, the Privy Council has considered what should happen where an event occurs which necessitates changes to a contract, but the parties are unable to agree a variation. The Privy Council had to decide whether the supplier should be allowed to rely on a force majeure clause to relieve it of liability for future performance (Delta Petroleum v BVI Electricity Corporation).

Outsourcing guide

Travers Smith has, again, written the UK chapter of the PLC Global Guide to Outsourcing 2021. 

The Guide covers many of the key issues to consider on a UK outsourcing, including:

• Legal structures and procurement processes
• Data protection issues
  
  
• Customer remedies and protections
  
  
• Issues on termination
  
  
• Tax issues

Significant reform proposals 

The Government is consulting on plans to reform consumer law, including:

• giving regulators powers to impose fines of up to 10% of global turnover for breach of consumer legislation
  
  
• new rules regulating subscription contracts (whether for the supply of goods or services); and
  
  
• new rules on fake reviews and practices such as "drip pricing" in an online context (e.g. where products are advertised at an attractive headline price but it does not include fees and charges that are added during the purchasing process).

If implemented, these changes are likely to result in a significantly tougher regulatory environment for consumer-facing businesses. For more detail, see our briefing on the consultation.

Also of note, particularly for online consumer-facing businesses, is a new pro-competition regime for digital markets involving a special unit within the Competition and Markets Authority dedicated to this area. 

B2C terms: a (very) costly mistake

Following a High Court ruling on its online terms, gambling firm Betfred has agreed to pay out £1.7m to a player of an online casino-style game. Betfred argued that the winnings resulted from an error in the game's software and that its consumer-facing terms and conditions allowed it to withhold payment; the High Court disagreed. The case contains a number of lessons for businesses when drafting/presenting B2C terms, particularly in an online context. Our briefing also looks at what businesses can do to limit their exposure to software errors such as the one that occurred in this case.

CMA loses care home pricing case

The Competition and Markets Authority (CMA) has lost a court action brought against a care home operator, Care UK, which it alleged had been insufficiently "upfront" about its pricing structure (notably an administration fee which, it was alleged, was not disclosed sufficiently early in the sales process). In particular, the CMA failed to persuade the High Court that the pricing provisions in question constituted an unfair term and/or that they were presented in a way which amounted to an unfair practice.  

Whilst we await the full judgment, we understand that the court took the view that consumers are typically careful about choosing care homes and compare a number of different providers, disagreeing with the CMA's assessment that by the time Care UK disclosed its administration fee, consumers would tend to be "emotionally committed" to the transaction (allegedly making the late disclosure "unfair"). It also noted that the administration fee was relatively small compared with the overall level of fees. The CMA does not plan to appeal.

This appears to be a significant defeat for the CMA but we do not think it will dissuade the regulator in seeking to tackle pricing practices that it regards as misleading. 

In particular, we suspect the CMA will continue to be concerned about businesses which (in its view) use an attractive headline price to attract customers but then add on further charges during the purchase process (to the detriment, potentially, of businesses which have tried to be more upfront with consumers about their pricing). 

The Government appears to share this concern, hence its proposals to introduce further regulation of practices such as "drip pricing" in an online context (see above).

Significant reforms proposed 

The Government has launched a raft of consultations proposing far-reaching reforms to the competition law space in the UK. The proposals include substantial changes to the processes for conducting Competition Act enforcement cases, as well as to the UK regimes covering merger control and market investigations. Our briefings summarise the proposed changes here and here.

The Government is also consulting on:

• proposed amendments to CMA guidance to ensure that parties agree, when settling Competition Act investigations into anti-competitive agreements, not to subsequently appeal the CMA's decision and
  
  
• specific proposals to govern the digital technology sphere, including enhanced scrutiny of mergers involving 'Big Tech' and powers for the new Digital Markets Unit within the CMA. Read our briefing for more on this.

Alongside these consultations, the Secretary of State for Business, Energy and Industrial Strategy (BEIS) has requested advice from the CMA on how the UK can better use the tools available under competition and consumer law to achieve the Government’s net zero and sustainability goals. That advice is due by early 2022.

BEIS is also launching a new inquiry on state aid and post-Brexit competition policy, starting with a call for evidence on matters such as the adequacy of the new tools and powers proposed in the consultations discussed above, how the CMA should manage its enhanced responsibilities post-Brexit, how the CMA should work with EU and US authorities in the digital space going forward and whether the framework for subsidy control in the Subsidy Control Bill is fit for purpose. The inquiry is likely to begin in late October.

We discuss the implications of the Subsidy Control Bill in more detail in our briefing.

Given the far-reaching nature of the proposals, and the time that Government has taken to reach this stage (since earlier proposals from Lords Penrose and Tyrie and the Furman Report), the outcome of these consultations will be keenly awaited. 

Trends in climate change and value chain litigation

The heightened focus on ESG issues in the current business environment is beginning to manifest in claims brought through both UK and international courts, highlighting the risks which flow from enhanced ESG-related regulation and the activist agenda.

Please see our articles in the ESG and Sustainability section above for commentary on the latest developments, both here and overseas, in climate change and value chain litigation.

As is apparent from our articles, these ESG-related cases have often involved novel tortious claims, pushing at the boundaries of established liability frameworks.

Civil justice council report on mandatory ADR

In June 2021 the Civil Justice Council's Alternative Dispute Resolution ("ADR") Working Group published an interesting report which considers two key questions: (i) whether parties can lawfully be compelled to participate in ADR in this jurisdiction; and (ii) if so, whether and in what circumstances such compulsion might be desirable. For these purposes, ADR meant any dispute resolution technique in which the parties are assisted in exploring settlement by a third party, whether an agent external to the court process (e.g. a mediator) or a judge playing a non-adjudicative role. Types of ADR considered included typical face-to-face mediations, short-form telephone mediations, techniques where a third party gives a non-binding appraisal of what the outcome of the dispute is likely to be (such as Early Neutral Evaluation) and a range of possible novel online processes.

The report concludes that ADR can lawfully be made compulsory in this jurisdiction. On the question of whether and when compulsion might be desirable, the report recognises that further detailed work is needed.  However, it does envisage a greater role in future for compulsory judge-led ADR processes, which are already in use in some contexts e.g. the Family Division, and which appear to be relatively effective. It also considers that compulsory mediation should be considered in some contexts – where appropriate in short, affordable formats. 

Whether the undoubted benefits of ADR can be preserved when it is made compulsory remains to be seen.

Post-Brexit data bridge

In June 2021, just as the data bridge in the TCA was about to expire, the EU granted the UK adequacy, meaning that for now, personal data can flow freely from the EEA to the UK.

However, as we set out in this briefing, this doesn't mean that we can necessarily relax about data flows from the EEA to the UK.

Schrems II

Following on from the CJEU's decision in Schrems II, in early summer, the EU released its new set of EU standard contractual clauses (SCCs) for restricted personal data transfers to third countries. These clauses are designed to update the old set of EU model clauses following the implementation of GDPR, to address some of the issues about ensuring equivalent EU data protection in third countries which were raised in Schrems II, and to make the SCCs fit for purpose and reflective of the transfer scenarios that take place in the current market. Alongside that, the EDPB released guidance on carrying out transfer risk assessments when relying on SCCs as a safeguarding mechanism for transferring data out of the EEA.

The old model clauses ceased to be valid for use in relation to new data transfer arrangements with effect from 27 September 2021, and from thereon only the new SCCs can be used when putting in place arrangements which rely on model clauses for data transfers. Organisations which already have current agreements in place using the old model clauses, have a grace period until 27 December 2022 to update their agreements to the new SCCs.

For further details see: New standard contractual clauses for EU personal data transfers to third countries (traverssmith.com)

Facial recognition technology

The Information Commissioner released an opinion in early summer 2021 on the use of live facial recognition technology in public places, and how to mitigate the data protection risks.

Facial recognition technology relies on the process of identifying or verifying a person's identity using their facial features. In a real estate context, it can commonly be found within entry systems which automatically grant entry for staff and authorised visitors instead of issuing a key fob or a card. One such use is passport verification at airport security points. These sorts of uses are usually carried out with the subject’s knowledge and usually work to their advantage by speeding up processes and providing enhanced security.

Live facial recognition technology (“LFRT”) is more controversial. It works by using facial recognition software to scan real time video footage, detecting faces in a frame, and then checking them against set criteria, such as a watchlist. Controversies revolve around claims that some uses of LFRT in public places i) undermine an individual's privacy; ii) entrench bias, bearing in mind that some systems have varying levels of accuracy according to the subject’s demographic group; and iii) enable corporate and/or public organisations to wield disproportionate power to monitor the population, which could potentially undermine rights such as the freedom of expression and association.

Data protection issues and LFRT

The Information Commissioner's Office (the ICO) (which is the body responsible for overseeing data protection compliance in the UK), recently published a Commissioner's Opinion setting out its views on the use of LFRT by organisations in public places. For companies operating in the real estate sector wishing to make use of LFRT they should, amongst other measures:

• complete a data protection impact assessment assessing the risks and potential impacts on the interests, rights, and freedoms of individuals. This assessment should be regularly updated, and the Commissioner recommends that it should include an element of public consultation; and
  
  
• carefully evaluate their plans with a rigorous level of scrutiny. The law requires them to demonstrate that their processing can be justified as fair, necessary, and proportionate.

These requirements essentially mean that where LFRT is used in public places, there is a high bar for its use to be lawful.

Please see our briefing for further details of the steps which organisations using LFRT should take to ensure that they remain compliant with data protection laws.

UK CMA and ICO cooperation on digital markets

In early summer 2021, the ICO and the CMA set out their blueprint for co-operation in digital markets to ensure meaningful user choice and control while at the same time helping to maintain standards and regulations to protect privacy: UK CMA and ICO cooperation on digital markets | Travers Smith

The ICO consults on its international data transfer agreement

The ICO recently launched a consultation on its draft International Data Transfer Agreement and accompanying transfer risk assessment toolkit, for use in respect of restricted data transfers to third countries under UK GDPR. The consultation closes on 7 October 2021. For further details of the issues raised, and a heads up on what organisations are likely to have to address when carrying out data transfers using the IDTA, please see our briefing.

Lloyd v Google case

The Supreme Court's judgment in the long-awaited case of Lloyd v Google LLC is widely anticipated to land this autumn. This is a landmark judgment which will set the scene for class actions in the UK in respect of breaches of data protection laws.

This is an issue which has been steadily developing since the GDPR's express provisions which permitted class actions to be brought for breach, to various consultations run by the Government on class actions, and a number of cases brought against mainly large social media/tech companies (for example an action is currently being heard against TikTok for unlawfully collecting children’s private information in the UK and Europe).

Latest DCMs announcements

DCMS have made a number of announcements in recent weeks:

• with respect to their approach to granting adequacy decisions, and their list of priority countries for adequacy assessment, including the US, Singapore, the Dubai International Finance Centre, and Australia
  
  
• launching a wide ranging consultation on data protection reform in the UK which is open until 19 November 2021.

Sky v Skykick

This summer, the Court of Appeal reached its decision on whether broad trademark registrations are an indication of (and can be invalidated based on) bad faith.

In this video, we take a closer look at the judgment and the conclusions which can be drawn for businesses which do wish to file broad-based trademark applications.

UK exhaustion of rights regime

A consultation on what the most appropriate exhaustion regime for intellectual property rights and parallel trade should be following the UK's departure from the European Union, has recently concluded.

What is exhaustion and parallel trade?

IP rights holders can take legal action against infringement of their rights. However, once a good has been placed on the market in a specific territory by, or with the consent of, the rights holder, the IP rights protecting this good are considered “exhausted”. At this point, the right to take legal action against infringement, alongside the right to control distribution and resale of physical goods, is lost. This supports a market of secondary sales of legitimate goods, also known as parallel trade. Parallel trade (as defined by the consultation) is defined as goods that are lawfully manufactured by the rights holder or under licence and are lawfully first placed on the market then moved across territorial borders. Parallel trade often occurs in order to benefit from price variations in different markets.

The current situation

Before the UK left the EU, the UK was a part of the EU’s regional exhaustion of IP rights regime. In this regime, the IP rights in goods legitimately first placed on the market anywhere in the EEA would be considered exhausted in the rest of the EEA. At present, the UK is unilaterally participating in the EEA regional exhaustion regime. This means that the IP rights in goods first placed on the market in the EEA are considered exhausted in the UK. Therefore, these goods can be parallel imported into the UK without the rights holder’s permission. However, following Brexit, the situation is not the same in reverse: goods placed on the market in the UK, cannot be exported into the EEA without the consent of the IP rights holder.

Next steps

The consultation discusses four possible regimes for the future. These are: 

• UK+ regime – maintain unilateral participation in the EEA regional exhaustion regime
  
  
• National exhaustion regime – parallel imports not automatically permitted from any country
  
  
• International exhaustion regime – parallel imports automatically permitted from any country (assuming there is separate authorisation for regulated goods such as medicines)
  
  
• Mixed regime, ability to parallel import will depend on any decision on treatment for a specific IP right, good or sector.

At present the Government does not have a preferred option and will assess all options in light of evidence and representations received.

Analysis

Ultimately the future approach will be a balancing exercise between the protection offered to creators, and the need to allow fair competition, wide consumer choice and fair market pricing. Whilst a national or UK+ regime is likely to be the preferred option for IP rights holders, an international exhaustion regime is likely to have the greatest impact on promoting parallel trade and the price of goods for consumers.

However, the impact of such a regime on domestic IP rights holders could be significant. The Publishers Association has claimed that up to 64% of publisher revenue could be at risk, and up to £506m of author and illustrator income if an international exhaustion regime is pursued.

Regulating AI

The EU introduced its draft AI Regulation in early 2021 aimed at creating a legal framework for regulating AI. In our briefing we discuss the possible approaches to regulating AI in the UK and US, now that the EU has set out its agenda.

What does the draft AI Regulation propose?

The European Commission has used a risk-based approach based on three tiers: (i) unacceptable risk, (ii) high risk, (iii) low risk. The use of unacceptable-risk AI systems is simply banned and includes uses that distort human behaviour and involve social scoring by public authorities. The main focus of the Regulation is on "high-risk" AI systems (defined in the Regulation), which will be subject to extensive technical, monitoring and compliance obligations. The draft AI Regulation sets out a system for the registration of stand-alone high-risk AI applications in a public EU-wide database. AI providers must provide "meaningful information" about systems and prepare conformity assessments. Certain systems in the low-risk category are subject to transparency obligations. The low-risk category is encouraged to self-regulate by implementing codes of conduct for example, or by adopting some of the requirements imposed on high-risk AI systems.

What does this mean for businesses?

Although the regulatory frameworks are yet to be finalised (in the EU) or even formally defined (outside the EU) there is no doubt that the regulation of the use and design of AI is heading our way – indeed the UK Government published its National AI Strategy on 22 September.  

Businesses can start to prepare by ensuring that the board and senior management are fully briefed on the AI technology and associated data used in the business, thinking through how they explain publicly the use of AI in the business, ensuring their risk profile, systems and governance address the risks that AI brings and what they must do if it falls within the EU’s ‘high-risk’ categorisation. These measures are likely to help relevant businesses in complying with the eventual EU Regulation or meeting any future requirements for assurance or a formal AI audit.

Security by design for consumer connected devices

In our briefing, we look at the announcement in the Queen's Speech for plans to legislate to create a legal obligation of security by design in respect of consumer Internet of Things connected devices. The overall objective is to ensure that no consumer connected device enters the UK market unless it incorporates basic cyber security measures. This will impact operators at different levels of the market.

The proposed legislation will apply to any network-connectable devices and their associated services that are made available to consumers, or primarily to consumers (e.g. smart phones, connected cameras, TVs and speakers, toys and baby monitors). The proposals will have consequences for manufacturers, distributers, and importers of consumer connected devices.

There are three basic security requirements that will apply to consumer connected devices:

• A ban on universal default passwords. This includes those passwords set in apps which are incorporated into the product and provided by a third party.
• A system will need to be set up so that vulnerabilities which are discovered can be reported to the manufacturer so that issues can be addressed.
• Transparency as to the minimum period for which devices will be protected through the issuing of security updates.

There will be an enforcement authority (it is yet to be confirmed which authority will take on this role) which can investigate, take action and guide businesses on how to comply.

Online Safety Bill

The Online Safety Bill was published in May 2021 and creates a legal framework based on a series of duties of care, for tech companies such as social media platforms and search engines to protect users from illegal or harmful content. A joint legislative committee has been set up to scrutinise the Bill.

This briefing takes a closer look at the Bill: who it applies to, the duties it creates, and the steps those organisations which are within scope can take to start preparing for it.

Health and Social Care Levy

On 7 September, the Government announced the introduction of a new 1.25% levy which is intended to pay for adult social care reforms and enable the NHS to tackle the Covid-19 backlog. The levy (to be called the Health and Social Care Levy) will apply from April 2022 and will initially be collected by way of a 1.25 percentage point increase to the rates of National Insurance contributions (NICs). From April 2023, the levy will be charged separately and the rates of NICs will return to their current levels. In the context of employment, the levy will be paid by both employees and employers (i.e. an additional 2.5% in total). Although the new levy will be administered in the same way as NICs, there are aspects of it that need to be clarified (for example, whether it will be covered by the UK's international agreements on social security co-ordination). For a summary of the new rules and expected NICs and levy rates please see our recent briefing on the subject.

Post-Brexit immigration

See the Beyond Brexit section above for information on the post-Brexit business travel rules for each EU jurisdiction and details of our interactive map.

Workplace sexual harassment

The Government ran a consultation in 2019 on possible reforms to the law on workplace sexual harassment. It has now published its response to that consultation, saying that it intends to introduce a new positive duty on employers to prevent sexual harassment in the workplace, along with a statutory code of practice on what the duty means in practice. The Government will also introduce explicit protections from workplace harassment by third parties (such as clients, customers and suppliers) and will consider extending the time limit for bringing discrimination and harassment claims in the employment tribunal from 3 to 6 months. The Government has not yet set out a timetable but has said the changes will be introduced as soon as parliamentary time allows.

Flexible working

The Government has launched a consultation on reforming the rules on flexible working requests to help encourage employers to adopt flexible working as the default position. One of the key proposals is that employees would be able to make a request for flexible working from day one of employment (currently employees need at least 26 weeks' service to make such requests). A range of other changes to the current regime are being considered as part of the consultation, which closes on 1 December 2021.

Ethnicity pay gap reporting

In 2018/2019, the Government consulted on introducing a mandatory requirement for large organisations to report publicly on the ethnicity pay gap within their organisation. Although the consultation has been outstanding for some time, the Government has come under mounting pressure to act in this area. The issue was debated in Parliament in September 2021, with the Government confirming that it is considering consultation responses and that it will respond to the consultation "in due course".

Landlord and tenant negotiations - update

The past year has seen the Government repeatedly extend the emergency measures introduced in the Corporate Insolvency and Governance Act 2020, the Coronavirus Act 2020 and elsewhere, which prevent landlords from seeking to forfeit business leases for arrears of rent and restrict the grounds on which they can apply for a winding-up petition or utilise Commercial Rent Recovery.

The current moratorium on landlords exercising forfeiture for non-payment of rents has been extended again and will now expire on 25 March 2022. There is also an extension to the end of March 2022 to the current restriction against the use of statutory demands and/or winding up petitions in respect of arrears of rent unless those arrears were not as a result of the pandemic.

For more on this topic, see our briefing on the measures in place and our subsequent comment piece on whether and how these measures might work.

The repeated lockdowns have impacted many businesses' ability to pay rent and, as a result, we have seen an increase in demand for turnover provisions in both new leases and as variations to existing leases. Listen to Sarah Walker (Senior Counsel) and Emma Pereira (Partner) discuss this recent trend in a Real Estate Bitesize video, one of a series of bitesize videos on various Real Estate topics.

Ground rent reform

The Leasehold Reform (Ground Rent) Bill 2021 was introduced into Parliament in May 2021, and as currently drafted will prevent landlords in England and Wales from charging ground rents in new leases of residential properties. While the intention is to protect tenants from unfair charges, there are some sectors that rely on ground rents to enable developers to provide valuable communal facilities. One such sector is the retirement housing sector.

In our briefing, we discuss the implications for retirement housing.

Break right conditions in leases

The Court of Appeal has found in favour of the tenant in a recent case considering the operation of conditional break clauses.

In Capitol Park Leeds v Global Radio Services [2021] EWCA Civ 995, the court overturned the High Court's earlier judgement to hold that 'vacant possession', for the purposes of exercising a break right, means free from people, chattels and third party interests.

It does not mean that a property has to be handed back in accordance with the contractual definition of the 'Premises'. In this case, although the landlord was entitled to recover compensation for losses due to the tenant's breach of its repairing covenant it could not use the disrepair to render the break ineffective.

The Building Safety Bill and unsafe cladding measures

The Building Safety Bill has been published with the aim of overhauling regulation around building safety and improving safety both during the design and construction of higher risk buildings (over 18 meters/six storeys high) and also during their lifecycle. Measures include:

• establishing a Building Safety Regulator to ensure that a building's safety (including fire-safety) have been adequately considered and measures implemented throughout design, construction and completion
  
  
• creating a new Homes Ombudsman Scheme to oversee and sanction developers who breach standards
  
  
• enabling property owners to claim compensation for defective works for 15 years (up from 6 years), through changes to the Defective Premises Act 1972; and
  
  
• establishing a regulator for construction products.

The Government has also announced a package of measures intended to resolve the problem of unsafe cladding on high-rise residential buildings, again defined as those over 18 meters (six storeys) high, together with a levy (the Building Safety Levy) expected to be introduced from 2023 on developers seeking planning consent for high-rise blocks and a tax on residential property developers (the Residential Property Developer Tax) expected to come into force in April 2022.  

The Government has published, for technical consultation, draft legislation regarding the tax, the precise scope of which is yet to be finalised, in particular, in relation to the build-to-rent and affordable housing sectors. Discussions on the design of the tax are continuing between the Government and industry. The technical consultation runs until 15 October 2021.

This briefing looks at the current consultation on the Building Safety Levy.  

Things to think about on an HQ move

Office relocation can be a complicated logistical exercise and a huge decision for any business. We have published a briefing setting out some of the key factors to consider from a real estate perspective on any potential HQ move.

Company meetings update

Following the lifting of social distancing restrictions and the expiry of the provisions in the Corporate Governance and Insolvency Act ("CIGA") which allowed companies to hold hybrid or virtual meetings regardless of provisions in their articles, companies can now revert to an old-style physical meeting for their annual general meeting or any other general meeting.

However, many companies have continued to supplement physical meetings with an online shareholder event. According to the recent GC100 report, based on a poll of FTSE companies, almost half of respondents indicated that a hybrid meeting would be their preferred format for future meetings, and most preferred to hold separate stakeholder events during the year rather than encouraging wider stakeholder engagement at an AGM.

Liability of former directors

In the recent case of Burnell v Trans-Tag Ltd, the High Court considered the scope of a former director's duty to avoid situational conflicts of interest under s 175 of the Companies Act 2006.

The judge decided that for the purpose of establishing a breach of the duty to avoid conflicts of interest in relation to a former director, it was not necessary to be able to point to some conduct of the director before or at the time he ceased to hold office. Given that the basic function of fiduciary duties is to regulate the conduct of those in a fiduciary position, it is problematic that a person who is no longer a fiduciary could still be subject to continuing fiduciary duties.

This is a notable case because it seems to extend the scope of the duty to avoid conflicts of interest beyond the position under common law and has introduced considerable uncertainty in this area. Following the judge's reasoning, a person who has resigned as a director may be found liable for breaching the duty under s 175 to avoid conflicts of interest on the basis of things done entirely after the director left office and without the need to establish that the resignation was in any way prompted or influenced by a desire to exploit any property, information or opportunity belonging to the company. It remains to be seen how this will apply to future cases.

Corporate criminal liability – Law Commission discussion paper

In June 2021, the Law Commission published a discussion paper on corporate criminal liability, which highlighted concerns that laws relating to corporate criminal liability are not working as well as they could. The discussion paper sought views on whether, and how, the law relating to corporate criminal liability could be improved so that it appropriately captures and punishes criminal offences committed by corporations and their directors or senior management.

In particular, it included questions relating to reform of the general rule for attributing criminal liability to companies, known as the "identification principle", further failure to prevent offences and the possibility of additional civil penalties. 

At the same time, the Government also launched a public consultation on some of the Law Commission's most pressing concerns and options for reform to government; an options paper is expected to be published towards the end of the year.

Directors' disqualification

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill is making its way through Parliament.  It includes provisions to extend the scope of the current statutory investigation and enforcement regime to include former directors of dissolved companies. In particular, the Bill would give the Secretary of State and the official receiver powers to investigate the conduct of former directors of dissolved companies without there being a requirement to first restore the company to the register, commence disqualification proceedings against them in appropriate circumstances and seek compensation where their conduct has caused loss to creditors. These new powers would have retrospective effect.

Consultation on restoring trust in audit and corporate governance

In March 2021, the Government published a consultation on restoring trust in audit and corporate governance – for more on this, see our Travers Smith Alternative Insights article on reporting by large private companies.

The consultation sought views on wide-ranging reforms intended to strengthen the UK's audit, corporate reporting and corporate governance system, and responded to recommendations made by the Kingman review on the regulation of the audit industry and the Brydon review into the quality and effectiveness of audit. In particular, the consultation proposed that large public companies would be held to higher standards of governance; and directors would have increased liabilities (for example greater accountability for internal controls, dividends and capital maintenance, new reporting requirements, investigation and enforcement powers for the audit regulator to deal with wrongdoing by directors and strengthening malus and clawback provisions within executive directors' remuneration). A further proposal was to expand the definition of "public interest entity" to include large private companies with two possible options for the meaning of "large" in this context.

The consultation closed on 8 July 2021 and we await the response.

With Brexit prompting an examination of the UK listing regime (in particular, a drive to tailor it to meet the needs of the UK market), and with critics accusing London of having lost its appeal, we are likely to see a radical shake-up of the prospectus and listing regimes.

In March 2021 HM Treasury published the UK Listing Review report setting out the Government's recommendations on the UK listing regime following a review chaired by Lord Hill. The report identified an urgent need to reform the Listing Rules and the prospectus regime to ensure the UK remains efficient, attractive and competitive post-Brexit. For further information, see our briefing. 

Changes to the Listing Rules have already been introduced in relation to special purpose acquisition companies ("SPACs") and we await the outcome of the FCA's consultations on the review of the UK prospectus regime (see our briefing) and the effectiveness of the primary markets (see our briefing).

For an overview and commentary on these upcoming changes, and on ECM trends and statistics generally, please see our ECM H1 Update.

LIBOR discontinuation

LIBOR, the reference rate of interest for many financial contracts, will for the most part be discontinued after 31 December 2021. SONIA (the "Sterling Overnight Index Average") is the preferred replacement rate for LIBOR in sterling markets. Regulatory guidance from the FCA and Bank of England has served to minimise new loans, bonds and derivatives business transacted on the basis of LIBOR since the beginning of Q2 2021. Throughout 2021, corporate borrowers have been working with their lenders to transition existing LIBOR exposures. In many cases, SONIA-based pricing has been adopted through the amendment of existing documentation. For further details, see our mid-year round up.

Corporate borrowers should continue to identify older contracts (not just loans) which reference LIBOR and do not feature such provisions and engage with counterparties to amend affected contracts. Our commentary on consequences for other commercial contracts which reference LIBOR (for instance in late payment clauses) is available here.

UK Government phases out some – but not all – temporary measures preventing winding-up petitions

In response to the COVID-19 pandemic, legislation was introduced during 2020 to prevent creditors filing statutory demands and winding up petitions on the basis of their debtor's inability to pay its debts, unless it could be shown that non-payment was not a result of the pandemic. These temporary measures had been extended a number of times during the pandemic as businesses continued to suffer the effects of multiple lockdowns and trading restrictions but are now gradually being phased out. More detail in our related briefing.

Pension Schemes Act 2021

The Pension Schemes Act 2021 is in the process of being brought into force.  There are implications for corporate activity where there is a defined benefit (DB) pension scheme and new requirements for trustees of all schemes, including in relation to climate change matters.  Key aspects and commencement dates are as follows.

• Climate change governance and public disclosure requirements for trustees based on the recommendations of the Taskforce on Climate-related Financial Disclosures (from 1 October 2021 for schemes with £5 billion or more in relevant assets and authorised master trusts; 1 October 2022 for schemes with £1 billion or more; no confirmed date for smaller schemes). These requirements are likely to impact scheme investment and funding/employer covenant strategies.
  
  
• Changes to the DB scheme funding regime, requiring a long-term funding and investment strategy, and new valuation expectations in a revised Pensions Regulator code of practice (date not confirmed but currently expected to commence in late 2022 or early 2023).
  
  
• New grounds for the Pensions Regulator to issue a contribution notice, requiring an employer or associated or connected party to make a lump sum contribution to a DB scheme, including where an act or omission would, hypothetically or actually, reduce the amount of 'section 75' employer debt likely to be recovered by the scheme from the employer in the event of insolvency (1 October 2021).
  
  
• New criminal offences and civil penalties up to £1 million, including for acts or omissions by anyone (not just connected parties) which put DB scheme members' benefits at risk, without a reasonable excuse (1 October 2021).
  
  
• Requirements to notify the Pensions Regulator and DB scheme trustees at an early stage, including a declaration of intent, in connection with certain kinds of corporate activity – to include material business sales and the granting of security with priority over debt to the scheme (likely to be April 2022).
  
  
• Scam protections, in many cases restricting the statutory transfer right and requiring trustees to ensure that the member takes guidance (date not confirmed but imminent).

For more detail, please see our briefing.

RPI reform

The UK Statistics Authority is expected to align the Retail Prices Index (RPI) with the Consumer Prices Index including owner-occupied housing costs (CPIH) when it can do so unilaterally, which is from February 2030, though a judicial review challenge is expected. 

This has funding implications already for DB schemes, but the impact is different depending upon whether the scheme increases pensions in line with RPI or CPI and the extent to which investments are hedged against inflation.

DC governance and disclosure

There will be various new measures designed to improve the governance of defined contribution (DC) trust-based schemes and otherwise to improve outcomes for members. Increased DC governance requirements and the associated costs are leading many employers with trust-based DC schemes to consider transferring the scheme to a master trust. The forthcoming changes include the following:

• The annual chair's governance statement will have to disclose investment returns net of charges in all default and also non-default funds (from 1 October 2021).
  
  
• The annual chair's governance statement and the scheme return to the Pensions Regulator will need to include a report on a 'value for members' assessment, for schemes with assets of less than £100 million operating for at least three years – this is intended to nudge smaller schemes towards consolidation (expected to apply in respect of the first scheme year to end after 31 December 2021).
  
  
• A ban on the charging of flat fees on default fund pots of less than £100 (expected to be from April 2022), possibly to be followed by a ban on flat fees altogether.
  
  
• Expected requirements for trustees to give a "stronger nudge" to Pension Wise guidance when members who are age 50 or over apply to take or transfer their DC benefits other than for the purposes of consolidation, unless the individual opts out of it (expected to take effect from April 2022).
  
  
• Simplified, two-page benefit statements are expected to be required (from April 2022).
  
  
• There is currently a push from government to facilitate DC schemes' investment in long-term, illiquid assets, including by allowing the smoothing of performance fees over five years.

The Government has created an extensive regime to strengthen its powers to scrutinise transactions on grounds of national security.

The NSI Act received Royal Assent on 29 April 2021, and the new regime will come into force on 4 January 2022, introducing a hybrid mandatory and voluntary notification regime. Mandatory notification, and an associated stand-still obligation, applies to notifiable acquisitions in 17 key sectors. These include industries such as transport and communications, which might not be thought critical to traditional national security concerns.

It will be unlawful to complete a notifiable transaction in any of these sectors without prior approval from the Secretary of State. Failure to notify a deal to a newly formed "Investment Security Unit" will render the transaction void, and civil and criminal penalties may be imposed. This means that transactions which may fall within the mandatory regime will have to be structured so that completion cannot take place until clearance has been obtained.

The regime also allows parties to notify transactions to the Secretary of State on a voluntary basis. Parties to transactions falling outside the mandatory regime will therefore need to weigh up the risks of not notifying i.e. that the transaction could be "called-in" for more detailed scrutiny (and ultimately, if found to raise national security concerns, ordered to be unwound).

This briefing summarises the key points to be aware of in relation to the NSI Act.

Notification of uncertain tax treatment

A new set of rules will be introduced from April 2022 which will require large businesses (those with a UK turnover exceeding £200m and/or a UK balance sheet exceeding £2bn) to notify HM Revenue & Customs (HMRC) if they have adopted a tax treatment which is "uncertain".  A notification will be required if any of the following three triggers arise:

• The taxpayer adopts a tax treatment that differs from HMRC's known position
  
  
• A provision has been recognised in the accounts of the taxpayer to reflect the probability that a different tax treatment will apply to the transaction to that adopted; or
  
  
• There is a substantial possibility that a court or tribunal would find the treatment adopted to be incorrect.

The threshold for notifications is £5m.

OECD international tax reform

The OECD announced in July 2021 that it had finally reached agreement on its two-pillar corporate tax reform plan, forming part of its project tackling base erosion and profit shifting (or BEPS). 

Pillar one aims to align taxing rights more closely with the location of customers or users. The Pillar one rules will reallocate a portion of the profits of a multinational enterprise (MNE) to market jurisdictions where the MNE has a substantial engagement in that market, regardless of whether it has a physical presence there. This measure will only apply to the largest businesses in the world - MNEs with annual global turnover above €20bn (reducing to €10bn in no earlier than seven years) that have a profitability threshold above 10% and do not fall within an exclusion.

Pillar two seeks to establish a global minimum corporate tax rate through a set of interlinked rules. The rules will apply to MNEs that meet a €750m turnover threshold (determined under the BEPS country by country reporting rules), and do not fall within an exclusion. Global anti-base erosion rules will impose top-up taxes where the effective rate of tax of a MNE in a jurisdiction is below the global minimum corporate tax rate (at least 15%). There will also be a subject to tax rule which will allow source taxation (for example, withholding taxes) on certain related party payments that are subject to tax below a minimum rate (7.5% to 9%).

Further detail on the design of Pillar one and Pillar two is expected to be published in October 2021. It is anticipated that the rules will be implemented in 2022 and will take effect in 2023.

New tax regime for qualifying asset holding companies

The UK is set to introduce a new tax privileged regime for qualifying asset holding companies (QAHCs) from April 2022.

For an asset holding company to come within the regime it must meet several eligibility criteria including that (broadly) it is an investment company that is 70% owned by "good" investors (including, diversely owned funds, UK REITs, tax exempt sovereign wealth funds and most pension funds).

The reliefs available for QAHC are generous and include a very simple and wide-ranging exemption from capital gains on most shares and overseas land. In addition, it is expected that investors will more easily be able to extract, in capital form, capital returns that the AHC has itself received.

The Government published draft legislation for certain aspects of the regime in July and is in the process of resolving outstanding design issues. Full detail of the new rules is expected to be contained in the Finance Bill.