UK: In Counsel - July 2011

Last Updated: 28 July 2011
Article by Tim Bird

In Counsel

At Wedlake Bell, we advise many in-house lawyers and we have built up very strong relationships with them over the years. We know that the job of in-house counsel is at times difficult. You have to give advice on a broad range of issues: from the balance sheet to the Takeover Code; from women on the board to paternity leave; from tax liability to carbon prices. We are here to help. Our quarterly bulletin gives you snapshots of all the hot topics that might affect your business.

COMMERCIAL, IP and IT

The new opt-in regime for cookies – a recipe for confusion?

By Adrian Heath-Saunders

The use of cookies to monitor the activities of website users is becoming ever more prevalent, especially in the realm of targeted online advertising. However, the latest rules on this form of data capture which came into force on 26 May 2011 are set to complicate the lives of those businesses that satisfy their hunger for information on web-users by the use of cookies.

Alive to the privacy concerns raised by some relating to the amount of personal data being obtained by the use of cookies, the European Commission issued a new directive in 2009 which set new rules for the use of cookies. That directive was implemented in the UK by the suitably obscure sounding Privacy and Electronic Communications (EC Directive) (Amendment) Regulations 2011 (the 'Regulations').1

The new cookie regime

As a result of the Regulations any business using cookies must:-

  • provide clear and comprehensive information about the purposes of the storage of, or access to, the information obtained by the cookie; and
  • obtain the consent of the computer user.

It is the latter requirement to obtain consent which is the key change for businesses to be aware of – this is now an "opt in" regime, as opposed to the old "opt-out" regime. Whilst the Regulations clarify that consent may be signified by a subscriber who amends or sets controls on his internet browser to signify consent, it appears that browsers are not yet configured in such a way as to enable businesses to rely on this provision. And there are conflicting views on whether making no change to a default setting on a browser could be construed as consent.

Consent is not required where the use of the cookie is strictly necessary for provision of an "information society service" requested by the subscriber or user. However, it is likely that this exception will be very narrowly interpreted. One example given by the Information Commissioner's Office (which has responsibility for enforcing the Regulations) is the use of a cookie in relation to online shopping baskets so that the contents of that basket can be remembered.

Enforcement grace period

Acknowledging the difficulties which businesses are likely to encounter in seeking to comply with this "opt-in" regime, Ed Vaizey, the Minister for Culture, Communications and Creative Industries, has stated that government intends to work with website operators to come up with workable technical solutions. In an open letter issued by him on 24 May 2011 he also stated that enforcement action will not be taken until appropriate technical solutions are available.

Cookies

A cookie is a small file which is placed on your computer or other device used to access the internet when you visit a website. The file will often enable the website to recognise you when you next visit the site in question. This is done in order to enhance your "user experience" – for example by remembering who you are and not requiring you to re-enter your name and address or by remembering your preferences for the manner in which the website appears on your computer screen. As well as being used to enhance the user experience, cookies are often used to track a web user's activities and the sites he or she has visited. This information can then be used to assess the user's interests with a view to delivering targeted advertising.

The ICO recommends that businesses should:-

  • audit their use of cookies;
  • assess how intrusive those cookies are; and
  • consider options for obtaining consent and decide on the best solution.

The Information Commissioner's Office (ICO) has indicated in its latest guidance2 that website operators have 12 months to get their house in order – but they do expect organisations to start taking action now so that they can properly comply by May 2012.

It seems, however, from the ICO's guidance that, in spite of the assurances given by Ed Vaizey, if appropriate technical solutions are not available by May 2012 so that website operators can rely on browser settings, they will by then have to be in a position to obtain consent in some other way, such as by the use of pop-ups and similar techniques or the use of terms and conditions which are accepted by users through the use of tick boxes.

Third party cookies

If a website permits third parties to set cookies on the visitor's device the process of obtaining consent will need extra thought. The ICO makes the point that any business permitting this form of activity should ensure that users are aware of what is being collected and by whom and allows them to make informed choices about what is stored on their device. Clearly the person with the responsibility for providing the relevant information and ensuring that it is accurate is the operator of the website and therefore they will need to ensure that they are given accurate information by the relevant third parties. It may therefore be time not only to audit the use of cookies on your websites but also to reconsider the terms under which you allow third parties to place cookies on your visitors' computer devices.

Fines

The new cookie regime is certainly not toothless. The ICO has the power to impose fines of up to £500,000 for breaches of the Regulations. Whilst this power will only be used where there have been serious breaches and those breaches are of a kind likely to cause substantial damage or distress, the ICO suggest that the requirement to show substantial damage or distress can be met in a situation where the damage or distress actually caused to any one individual is limited but large numbers of individuals are affected. As a result, businesses with particularly popular websites may find themselves in the firing line for fines.

Action Points

Any business which uses cookies will need to consider how best to comply with the new "opt-in" regime. In spite of the grace period for enforcement, delay in dealing with this is a recipe for disaster. Check now what cookies you are using and whether you allow third parties to plant cookies via your website. Consider how you are going to obtain consent. Monitor technical developments to take advantage, where necessary, of the possibility of obtaining consent through browser settings.

CONSTRUCTION

Upcoming changes to the law applying to construction contracts

By Becky Davey

The Housing Grants, Construction and Regeneration Act 1996 has been in force for over 10 years. It is an unusual piece of legislation as it implies terms into (nearly) all written contracts for construction work unless those contracts contain Act-compliant provisions. It gives the parties to relevant construction contracts the right to refer any dispute to a "quick and dirty" dispute resolution procedure called adjudication. The HGCR Act also provides a contractual payment mechanism for making payments for construction work and services. The Local Democracy, Economic Development and Construction Act 20093 which is expected to come into force in October this year will make several changes to the original Act, of which anyone dealing with construction contracts will need to be aware.

Background to the HGCR Act

In brief, the Housing Grants, Construction and Regeneration Act 1996 (HGCR Act) brought in the right to adjudicate and also introduced a contractual payment mechanism. This mechanism entitles the payee to stage payments for work done, and provides for calculating the sums due and the final date for payment. It also provides that if a payer does not serve a "withholding notice", he cannot withhold monies from the payee. If no such notice is served, the payee can suspend work until paid and refer any dispute to adjudication.

Adjudication is a dispute resolution procedure peculiar to the construction industry. It allows a party to a construction contract to unilaterally refer a dispute to an adjudicator at any time. The process from referral of the dispute to a decision only takes 28 days (unless a short extension is agreed). The decision of the adjudicator is binding until the decision is finally determined in court or arbitration, or by agreement between the parties. The courts will rarely overturn an adjudicator's decision unless it can be shown that there is a valid jurisdictional challenge (that is, the adjudicator acted without or in excess of his jurisdiction). The objective being that construction disputes are decided quickly, without having to wait until the contract has been performed, and without the parties having to engage in expensive and lengthy legal proceedings.

Parties to a construction contract can agree their own adjudication and payment terms within the limits of the HGCR Act, but if they do not comply with its basic requirements, then the provisions of the "Scheme" for payments under the Act automatically apply and imply terms into the contract.

The HGCR Act has a wide-ranging effect as it applies to all construction contracts (including those relating to architectural design and engineering) unless the contract is with a residential occupier or it falls into one of the exclusions. The Act does not apply to contracts for drilling and extraction of natural gas, oil and minerals, or to nuclear processing, power generation, or water or effluent treatment, or to the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink, nor does it apply to the making and installation of artistic works. If the contract is for the manufacture and supply of components, the contract must also provide for their installation to be caught by the Act.

Comment

The Local Democracy, Economic Development and Construction Act 2009 (LDEDC Act) will apply to all construction contracts that are entered into after the Act is brought into effect, which is expected to be some time in October 2011.

If you are entering into a construction contract around that date it is important to consider whether there are any subcontracts further down the chain. If there are, it is advisable to ensure that all contracts, whether in writing or partly or wholly oral (as, after the LDEDC Act comes into force, even parties to a partly or wholly oral contract can rely on the protection of the LDEDC Act) in the contractual chain are consistent to avoid a situation where, for example, the main contract is governed by the provisions of the HGCR Act but the sub-contracts (entered into a few weeks later perhaps) are governed by the LDEDC Act.

Practically speaking, if you have standard terms already in place that apply to construction works using the terminology of the HGCR Act, these will need to change and will need to be amended to be brought in line with the new payment procedure. Of course, the people actually administering payments under construction contracts will also need to be aware of the changes.

Suzanne Reeves, Head of the Wedlake Bell Construction Team sat on the Government Working Party set up to review the payment provisions of the LDEDC Act. She is also involved in the Joint Contracts Tribunal (JCT) Drafting Sub- Committee and has been involved in drafting amendments to JCT contracts to take account of the LDEDC Act changes.

Changes in the LDEDC Act

The courts and the construction industry have had over a decade to familiarise themselves with the HGCR Act and to iron out various issues that have arisen from it over time. The introduction of the LDEDC Act is set to raise new issues for the courts, legal practitioners and those working in the construction industry alike. The right to adjudicate and an implied contractual mechanism for payment are here to stay, but the LDEDC Act will make various changes to the HGCR Act. The key changes are as follows:-

  • The requirement for the construction contract to be in writing is repealed thus allowing the parties to an oral or partly oral contract to rely on the Act (which could cause some practical difficulties for adjudicators going forward).
  • Construction contracts shall include a written provision allowing the adjudicator to correct typographical or clerical errors (such as miscalculations) in his decision (the 'slip rule' which had previously been confirmed by the courts).
  • 'Pay when certified' clauses will be prohibited in most contracts. The main contractor cannot make payment to his sub-contractors conditional on his own payment by the employer being certified. This could have a significant impact on those working in the PFI industry.
  • The payment and withholding notices provisions are to be overhauled. For example, either party (rather than only the payer) may now issue a payment notice stating how much is due, and payment notices must be given even if the amount due is zero. If no notice to pay less is given then this notified sum becomes due.
  • The right to suspend if not paid will be stronger. The suspending party can claim the costs from the exercise of the right and can claim an extension of time to complete his work for the delays resulting from the exercise of the right.
  • Any contractual provision between the parties which deals with allocation of the costs of any adjudication must be made in writing in the contract and confer power on the adjudicator to allocate his fees and expenses between the parties (or can be agreed in writing after notice to adjudicate has been given).

CORPORATE

Best practice for issuers when raising equity capital

By Harriet Cahalane

On 19th May 2011, the Institutional Investor Committee (IIC) published their "Best Practice Guidance for Issuers when Raising Equity Capital"4. The guidance sets out institutional investors' views on best practice and sets out the conclusions drawn from the IIC's Rights Issue Fees Inquiry carried out in association with the Association of British Insurers (ABI), the National Association of Pension Funds (NAPF) and the Investment Management Association (IMA) in December 2010. The inquiry was prompted by institutional shareholders' concerns that unfamiliarity with the fundraising process meant that boards were less likely to challenge their advisers and banks, especially in relation to underwriting fees.

The Guidance sets out potential issues and suggests questions for companies to ask their advisers at each stage of the equity raising process.

Background preparation

Board members are advised to familiarise themselves with the equity capital raising process generally – it is suggested that companies should incorporate this into the directors' induction and regular evaluations – and engage with shareholders regularly. The appointment of advisers should always be made pursuant to an appropriate corporate governance structure and different structures and fee levels should be discussed with all advisers.

When the need for equity raising is identified, the possible structures for fundraising should be considered in detail at board level with key decision subject to an appropriate corporate governance structure. As part of this process the board should assess whether existing advisers should be used or if an alternative source of advice is called for and whether an independent financial adviser who would not underwrite any rights issue should be instructed. Using the company's corporate broker's parent bank for such transactions should not be a foregone conclusion and the existing relationship should not prejudice the decisionmaking process. The Guidance also highlights the relationship between the level of discount on a rights issue and the size of the underwriting fee.

The process

Board members should request a full breakdown of advisers' proposed fees. The Guidance also recommends that board members ensure that they understand what is being paid for and the purpose. Shareholders that have expressed a willingness to be made insiders should be consulted as part of the assessment of whether underwriting is required. The Guidance also gives advice in relation to sub-underwriting and other considerations for the board once the decision to undertake the issue has been made.

Post issue

The Guidance also considers the level of detail to be included in the public disclosure of the fees paid for capitalraising in press announcements and in the annual report and accounts. It recommends a breakdown of the differences between gross and net proceeds and, in the case of fee agreements containing a performance element, advance disclosure of the potential range of the performance fee.

To view this document in its entirety please click here.

Footnotes

1 The Privacy and Electronic Communications (EC Directive) (Amendment) Regulations (SI 2011/1208) are available at http://www.legislation.gov.uk/uksi/2011/1208/contents/made .

2 The ICO guidance on the Privacy and Electronic Communications (EC Directive) (Amendment) Regulations 2011 are available at http://www.ico.gov.uk/~/media/documents/library/Privacy_and_electronic/Practical_application/advice_on_the_new_cookies_regulations.pdf.

3 The Local Democracy, Economic Development and Construction Act 2009 is available at http://www.legislation.gov.uk/ukpga/2009/20/pdfs/ukpga_20090020_en.pdf .

4 The IIC Guidance is available http://www.iicomm.org/docs/bpguidance0511.pdf .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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