UK: COT's Top Four Commercial Issues - April 2018

Welcome to this month's edition of our commercial review, which features good news for IT suppliers looking to be considered for public sector work and the House of Lords showing there is nothing artificial about their intelligence.


House of Lords publish report into the development and use of artificial intelligence

The Select Committee on Artificial Intelligence ("AI"), appointed by the House of Lords to consider the economic, ethical and social implications of advances in AI, has published its much anticipated report (the "Report").

The Report concludes that the UK is in a strong position to be among the world leaders in the development of AI but must put ethics first, as the sector develops. The Report is designed to support the UK Government in realising the potential of AI for society and the economy, and to protect from potential threats and risks.

The Report sets out the five principles that could become the basis for an AI code / framework:

  • AI should be developed for the common good and benefit of humanity.
  • AI should operate on principles of intelligibility and fairness.
  • AI should not be used to diminish the data rights or privacy of individuals, families or communities.
  • All citizens should have the right to be educated to enable them to flourish mentally, emotionally and economically alongside AI.
  • The autonomous power to hurt, destroy or deceive human beings should never be vested in AI.

The Report has asked the Law Commission to investigate whether English law is "sufficient" when systems malfunction or cause harm to users.

From a regulatory point of view, the Report states that the Competition and Markets Authority must investigate the use of data by the bigger players operating in Britain (naming Google, IBM and Microsoft) warning that the increased consolidation of power and influence could monopolise the market at the expense of start-ups. The Report also recommends the responsibility of regulating AI systems should fall to existing regulators such as Ofcom, Ofgem and the Information Commissioner's Office rather than suggesting a new AI regulator.

Government to launch G-Cloud 10 in June 2018

The Government has announced that the new G-Cloud 10 framework will go live in June this year. G-Cloud 10 will enable new suppliers to be added to the framework, allow existing suppliers to add new services and for prices to be changed.

The Crown Commercial Service ("CCS") has confirmed that it is accepting new bids from suppliers wanting to join the updated version of the G-Cloud framework from April 2018, in anticipation of the next version going live in June. The G-Cloud is a framework which enables UK public sector bodies to purchase cloud-based services and provides access to an open, transparent and competitive platform called the Digital Marketplace. For IT suppliers, there is an opportunity to win major public sector contracts through G-Cloud.

At the moment, there are 2,856 suppliers listed on the framework, with SMEs making up the bulk of them (90%), with 48% of total sales through the framework awarded to small IT suppliers. According to figures jointly published by the Government Digital Service and CCS at the start of February 2018, more than £2.8bn of cloud services have been procured through the framework since its launch.

Rob Driver, Head of Public Sector at trade body TechUK, said any reinforcement of the government's support for SME IT suppliers is most welcome by adding "for the UK Government to deliver its ambitious vision of being world-leading in the next wave of digital government transformation, it must embrace the full diversity and strengths of UK tech suppliers, and innovative procurement vehicles such as G-Cloud will be fundamental in achieving this vision".

For more information, click here for the Government's guidance on "What to do and when for G-Cloud 10".

The importance of LIBOR

Once heralded as the 'the world's most important number', the London Inter-Bank Offer Rate (LIBOR), is set to be phased out by 2021.

LIBOR is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks and acts as a fundamental reference rate in numerous contracts, both in the financial markets and in commercial contracts. Interest rate swaps, syndicated loans, certain bond rates, and even domestic residential mortgages are frequently pegged to LIBOR. We often see commercial contracts using LIBOR for late payment mechanics or pricing adjustments.

However, LIBOR is rife with problems. Its method of calculation, based on estimations submitted by the banks each day, is inexact and open to market manipulation and misconduct. It has been plagued by scandal and this has, together with the decreasing activity in the interbank lending market, ultimately led to the Financial Conduct Authority (FCA) stating that market participants should not rely on LIBOR being available after 2021.

Given the huge volume of financial transactions and underlying contractual documentation that use LIBOR as a benchmark, this announcement has created waves in the loans and bond markets as they grapple with uncertainty and finding a suitable replacement reference rate.

The solution is perhaps clearer for commercial contracts seeking a reference rate for late payment interest calculations and price adjustment mechanisms due to the widespread use of alternative reference rates. Given the uncertainty around the future of LIBOR, it would be wise to avoid using LIBOR in new contracts and instead use other generally accepted reference rates, such as central bank rates. Consideration should also be given to any existing long term contracts that extend beyond 2021, which use LIBOR as the reference rate and whether it would be prudent to amend these now or wait until such time as LIBOR ceases to exist.

A (business) tale as old as time...

Two friends embark on a venture and then, suddenly, the friendship sours...

In this case, the friends in question were Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan, a member of the Abu Dhabi Royal Family, and Ioannis Kent, a Greek businessman, who set up a joint venture hotel business together in 2008. Their friendship continued until October 2011, when the hotel business was facing a severe cash shortfall and was desperately in need of additional funds, which Sheikh Tahnoon was unwilling to provide.

It was agreed that Mr Kent would repay Sheikh Tahnoon for his investment contribution into the business; and the scheme was arranged pursuant to a framework agreement and a promissory note, requiring repayments to be made to Sheikh Tahnoon.

Mr Kent argued that threats of physical violence were made against him in order to force him to enter into the promissory note, and that Sheikh Tahnoon was in breach of fiduciary duties and good faith owed to him and that, but for these breaches, he would not have entered into either the framework agreement or the promissory note.

The court rejected the argument that fiduciary duties were owed by Sheihk Tahnoon to Mr Kent, on the basis that "the kind of trust and confidence characteristic of a fiduciary relationship" would have required a relationship of a different nature between the parties.

Whilst English law does not have a doctrine of good faith, LJ Leggatt built on his previous judgment in Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB) and found that a duty of good faith had arisen from this "relational contract". He referred to his earlier judgment where he had defined a "relational contract" as one that requires communication, cooperation, mutual trust and loyalty between the parties "which are not legislated for in the express terms of the contract but are implicit in the parties' understanding". He determined that types of "relational contracts" might include some joint venture contracts and distribution agreements and would implicitly require (in the absence of a contrary indication) an obligation of good faith. However, as LJ Leggatt notes, it is "perhaps impossible" to define what constitutes "good faith", although the amount of case law (both in the UK and in Australia) continues to grow.

In this case, Sheikh Tahnoon failed to act in good faith on two fronts (i) by agreeing or entering into negotiations to sell the jointly owned interest to a third party "covertly" and without informing the beneficial owner (Mr Kent); and (ii) by using his position as a shareholder in the venture to obtain a financial benefit for himself at the expense of Mr Kent.

Parties entering into agreements which could be deemed "relational contracts" can seek to limit an implied "good faith" term by ensuring that express terms govern the scope of their relationship and seek to deal with "what if" scenarios, including exit strategies for both parties.

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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