IDTA

IDTA: One Small Step for Data Protection, One Giant Leap for the UK

IDTA or international data transfer agreements, after the current ICO consultation, are likely to be the new means by which organisations can transfer data out of the UK. On the 11th August 2021, the UK’s data protection regulatory body, the Information Commissioner’s Office (ICO) announced that it has launched a consultation on how organisations can continue to protect people’s personal data when transferring it outside the UK. This includes a draft ICO international data transfer agreement (IDTA), draft international transfer risk assessment and tool and updated guidance. You have until 5pm on 7 October 2021 to make your opinions on the drafts heard.

IDTA - Background

Many organisation’s will be scratching their heads after reading the above. Another round of guidance issued on international transfers? Another consultation on draft clauses? You could be mixing it up with the 4th June 2021 adoption by the EU of new Standard Contractual Clauses (SCCs) (read our blog: Data Transfer: EU Adopts New Model Clauses). The new EU SCCs brought long called for clarity on issues stemming from the fact that the old SCCs had been drafted before the implementation of GDPR. There are two key elements to the background of this new ICO consultation: Brexit and the European Court of Justice’s ruling in Schrems II.

Brexit

With Brexit came the possibility for the UK to diverge from EU data protection laws. This is unlikely however, especially following the adoption of an adequacy decision by the European Commission on 28 June 2021. The adequacy decision allows data to flow freely from the EU to the UK. But it relies on the UK’s continued commitment to the obligations created by GDPR, as well as alignment on future developments in EU data protection rules (the adequacy decision will be automatically reviewed every four years).

Regardless of this willingness and incentive to remain aligned with the EU, the new EU SCCs will not apply in the UK due to Brexit, as with all new EU law, and so it was a natural progression for the UK to also adopt new clauses to reflect this change. Instead of SCCs, the ICO is calling this their international data transfer agreement (IDTA). Although the draft IDTA is in many ways similar to the new EU SCCs, there are also some differences. The changes are only really to do with the possible construction and use of the agreement rather than changing any of the actual obligations. An important way in which the ICO has followed the EU’s lead is by introducing measures reflecting the decision in Schrems II.

IDTA - Schrems II

The 2020 ruling in Data Protection Commissioner v Facebook Ireland and Maximillian Schrems (Case C-311/18) EU:C:2020:559, otherwise known as Schrems II, invalidated the EU-US Privacy Shield, essentially ending the free flow of data from the EU to certified organisations in the US. The ruling also introduced a new obligation on organisations transferring data out of the EU. It would now be necessary to undertake a risk assessment for such transfers.

Risk assessment

In response to these developments, the ICO has published a lengthy draft international transfer risk assessment and tool. At the start of the guidance it states:

“The Schrems II judgment embedded risk assessments into the rules on international data transfers. The Court held that before you may rely on an Article 46 UK GDPR transfer tool to make an international data transfer, you must carry out a risk assessment, and this is therefore a requirement under UK data protection laws.”

The ICO guidance focusses on two key aspects of the laws and practices of the destination country. First, whether the IDTA will be enforceable in that country, as this goes to the heart of what it means to put in place contractual protections. Secondly, it considers the destination country’s regime which might require that the importer gives third party access to the data being transferred. The most likely third party will be a government surveillance department. It is important to highlight which third parties may have access because this could conflict with the terms of an IDTA, which seeks to control and confine data to the parties of the agreement. Knowing exactly which third parties and for what reason they may have access is essential for assessing the safety of international data transfers, as reflected in Schrems II which deemed overly invasive US government surveillance as the main reason for invalidating the EU-US privacy shield.

The draft risk assessment produced by the ICO is supposed to be used alongside an IDTA. It states that it is only really intended to be used for routine international data transfers and that more complex transactions will need a more complex bespoke assessment. Complexity may be introduced by the riskiness of the data being processed or the human rights record of the country to which data is being transferred. The assessment and guidance includes:

  • There is no need for the country to which data is being transferred to have an identical data protection legal system but rather to reflect certain values.
  • It could be good for a country to have surveillance laws because this implies that such surveillance is being regulated.
  • There are examples to illustrate low, medium or high risk.
  • It highlights the importance of being able to enforce the data transfer agreement. A jurisdiction in which obtaining judgment is seriously impeded will increase risk.
  • The ICO states that if a risk assessment is undertaken, but such assessment turns out to be wrong, it will take into account the difficulty of carrying out such an assessment. Therefore, if the ICO deems an assessment to have been undertaken diligently, this will be reflected in any potential regulatory action.

Draft IDTA

The draft international data transfer agreement is bespoke to the UK. It is to be used when transferring UK personal data out of the UK. The improvements it makes:

  • The tables at the start of the agreement allow the parties to input all the information peculiar to their agreement. This is a simple way of making sure all of the information needed is available from the outset. Once organisations are used to the tables, they should be very easy to fill out and so new relationships should be easy to facilitate.
  • Unlike the new EU SCCs which provide a number of different modules, i.e. a number of different documents for different relationships such as a controller-to-processor agreement, processor-to-processor agreement etc., the new IDTA is a document which captures all such potential relationships. It does this by specifying that certain clauses do or do not apply to either processors or controllers or other third parties.
  • The agreements can also easily be made multi-party or can be drafted to give one party the power to make decisions for everyone.
  • The IDTA encompasses a wider range of relationships including transfers from a processor to a third party who is not a sub-processor, but some other third party, and transfers between joint controllers.

Using the EU SCCs

An important question which the new ICO drafts and guidance address is that of whether or not organisations can use the new EU SCCs to transfer UK personal data out of the UK. The answer to which is yes but on the condition that a “UK addendum” is added to any such agreement. The addendum will modify the parts of the EU SCCs referring to EU law and is flexible to further modification, within limits.

However, it is clear that the EU SCCs without modification will be insufficient and this is particularly concerning given that it will take a long time for the ICO to approve the addendum. Until the addendum is approved, data transfers to and from the UK and EU will have to be facilitated by different agreements. What is also clear is that the old SCCs will cease to be valid as they do not account for the provisions in GDPR or the ruling in Schrems II. The consultation proposes that the old SCCs should stop being used three months and forty days after the IDTA is laid before parliament. For existing data transfers that time period is extended to 21 months after the IDTA is officially approved.

It should also be noted that the draft addendum can be used to alter other data transfer agreements such as the New Zealand or ASEAN agreements.

IDTA - Make your voice heard

On the whole we think the proposals made by the ICO are sensible and should be supported, especially concerning the draft addendum to the new EU SCCs. The addendum will make UK-EU business much easier to manage, allowing organisations to use one set of clauses for all of their operations, regardless of jurisdiction, with only minimal extra documentation. For the moment however, organisations need to be wary of divergence in legal systems and the additional burdens created by the ruling in Schrems II. The risk assessment and guidance introduces welcome clarifications for international transfers, giving hope to the idea that if organisations use best efforts within the scope of the guidance given, this will be reflected positively in any ICO regulatory action.

EM law specialises in technology and data protection law. Get in touch if you need advice on data protection law or if you have any questions on the above.


liquidated damages clauses

Liquidated Damages Clauses: Supreme Court Overrules on Failed Software Delivery

Liquidated damages clauses exist to create certainty around how much can be claimed when a contract is breached. Put another way, they are introduced to deal with the difficulty of predicting the amount potentially recoverable as damages for breach of a contract. A recent ruling by the Supreme Court in Triple Point Technology Inc v PTT Public Company [2021] UKSC 29, explored liquidated damages clauses effectiveness in the context of the failed delivery of a software system. The case also explored the effectiveness of exclusion clauses and the definition of negligence.

Liquidated damages clauses

Liquidated damages clauses frequently appear in commercial contracts and, most commonly, in relation to late or defective performance, particularly in the fields of construction, engineering, supply of goods and shipping contracts. Advantages of liquidated damages clauses include:

  • The parties can know in advance what their liability is and how much they could receive in a breach specified by liquidated damages clauses.
  • They could make recovery of damages easier. This is due to the fact that liquidated damages clauses are enforceable regardless of needing to quantify the loss actually suffered by the innocent party, as would be the case when considering the amount payable to the innocent party when unliquidated damages apply (read our blog on the topic: Damages for Breach of Contract). The claimant simply must show that a breach of contract falls within the scope of the liquidated damages clause. It therefore follows that a claimant may be able to recover more than would be recoverable if the damages were unliquidated (as affirmed in Philips Hong Kong v AG of Hong Kong [1993] 61 BLR 41).
  • Vice-versa, liquidated damages clauses can work in favour of the party responsible for the breach where the damages caused would be more if unliquidated. When considering the drafting of such a clause, it is important to have these considerations in mind, including who is likely to be in breach and what sort of magnitude is imaginable, whilst also being aware that if liquidated damages clauses do not represent a genuine pre-estimate of potential damages, they could be deemed invalid.
  • They help with dealing with minor breaches in long-term contracts (such as construction) and so help to maintain a commercial relationship when there have been minor breaches throughout. In this vain, liquidated damages can be applied to specific obligations in a long-term commercial agreement and so compartmentalise potential breaches.

Can you still claim for general damages when liquidated damages clauses are included in the contract?

Usually, liquidated damages clauses relate to specific breaches and so only apply to the scope of the breaches referred to in the clauses themselves. Therefore, general damages will be claimable for breaches beyond the scope of liquidated damages clauses, subject to any other provisions in the contract. There have, however, been some unusual exceptions to this rule. Including:

So long as liquidated damages clauses clearly state the sort of breach they apply to and how they will operate, the exceptions referred to above should not apply. In Triple Point v PTT the case hinged upon some ambiguous wording in a liquidated damages clause, further proof that such clauses need to be considered at length. We now explore this recent case in depth.

Liquidated damages clauses: Triple Point v PTT

Triple Point Technology Inc (Supplier) contracted to design, install and maintain a software system for PTT Public Company (customer). Payment was due in instalments on completion of milestones. The supplier’s performance did not meet the contractual timetable. Some of the delayed work was accepted and paid for but the customer refused to make other payments for work not yet completed. The supplier suspended work and the customer terminated the contract.

Liquidated damages clauses point in Triple Point v PTT

The supplier brought an action for payment of its unpaid invoices. The customer counterclaimed for damages and liquidated damages under the contract, as provided under article 5.3:

“If the supplier fails to deliver work within the time specified and the delay has not been introduced by the customer, the supplier shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date the customer accepts such work, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.”

As shown in bold above, the point here was whether PTT had to accept the work for the liquidated damages to be payable. Put another way, article 5.3 could be interpreted to mean that damages for delay would only be payable under this clause if the work was eventually completed and accepted by PTT, which was not the case. Whilst the Court of Appeal held that the clause did not apply because the work was never completed, the Supreme Court criticised this and ultimately overruled it, deeming it inconsistent with commercial reality and the accepted purpose of liquidated damages clauses. The Supreme Court said that parties must be taken to know the general law, that is, that the accrual of liquidated damages comes to an end on termination of the contract, and so given the work had not been completed up to this point, the clause would apply. After that point in time, the parties must seek damages for breach of contract under general law.

The limitation clause point in Triple Point v PTT

Article 12 of the contract placed a cap on the amount of damages that could be recovered and included an exception from that cap for “negligence”:

“… The total liability of the supplier to the customer under the contract shall be limited to the contract price received by the supplier with respect to the services or deliverables involved under this contract. … This limitation of liability shall not apply to the supplier’s liability resulting from fraud, negligence, gross negligence or wilful misconduct of the supplier or any of its officers, employees or agents.”

The Court of Appeal held that the word ‘negligence’ must mean some independent tort and did not mean breach of a contractual duty of skill and care. In other words, the Court of Appeal concluded that the cap applied to negligently performed contractual duties and therefore Triple Point’s liability for its negligent approach to contractual duties would be limited by the cap. The Supreme Court disagreed, holding that negligence should be given its natural and ordinary meaning of removing from the cap all damages for negligence on the supplier’s part, including damages for negligent breach of contract. Therefore Triple Point’s negligent approach to contractual duties was not capped and their total liability (including under the liquidated damages clause) amounted to just over $14.5 million.

Draft carefully

The context in which liquidated damages clauses classically apply is in a construction context. This is because construction projects span many years, many stages of development and, usually, many parties. Consequently, to thread these various elements together without allowing small-scale breaches to break down a project, liquidated damages clauses are a useful way to define exactly what remedy is available for failed or delayed sections of work. As shown by Triple Point v PTT, these clauses are also significant in any long-term delivery supply contract and employment contracts also often make use of them. This ruling will be received with relief by many, especially considering many were concerned by the lack of commercial consideration in the Court of Appeal’s decision.

What becomes clear from looking at case law in this area is that the wording of liquidated damages clauses can have a significant impact on how they will be interpreted if a contractual relationship goes to litigation. Given the often-bespoke nature of these clauses because they concern the specific work to be done and any imaginable remedies, there is a risk that the wording can be loose and therefore seeking legal advice is very important. These clauses need to be meticulously thought through.

If you have any questions about liquidated damages clauses or about contract law more generally please contact Neil Williamson.


minority shareholders' discount

Minority Shareholders’ Discount: Meaning of Fair Value

Minority shareholders’ discount is a controversial topic. In the recent High Court case, Re Euro Accessories Ltd [2021] EWHC 47, it was held that a minority shareholder should receive less than the shareholding pro rata to the value of the entire issued share capital. Taken at face value this is an unsurprising conclusion given that it is a well enshrined principle that a minority shareholding, due to its lack of control over a company, cannot expect to receive a buyout amounting to a pro rata valuation of the entire issued share capital. Many view this as prejudicial against minority shareholders. The important thing to take away from this case is that minority shareholders should pay close attention to articles of association and shareholders agreements, with a view to defining what exactly ‘fair value’ of their shares will be when it comes to their transfer, so that they do not fall foul of the minority shareholders’ discount.

Minority shareholders’ discount – Re Euro Accessories

The facts of this recent case are as follows. The company was incorporated by the majority shareholder (MAJ) on 15 December 2000. The minority shareholder to be (MIN) joined the company in 2003 as a sales representative. On 22nd February 2008 MAJ voluntarily transferred 24.99% of the then issued share capital of the company to MIN. This is significant because by retaining 75% or more of the shareholding, MAJ would still be able to pass special resolutions. A special resolution can, among other things, alter the articles of association. Articles of association regulate the internal affairs of a company including the issue and transfer of shares and therefore, if worded accordingly, have the capacity to take advantage of a minority shareholders’ discount.

In early 2010, the relationship between MAJ and MIN came to an end and on 31 January 2010, MIN resigned from the company. MAJ wanted to purchase MIN’s 24.99% shares which MIN was also happy to sell. Issues arose around the value of such shares, with offer and counteroffer being consistently rejected.

Minority shareholders’ discount – ‘fair value’

MAJ finally decided to use his majority control of the company to pass three special resolutions on 9 March 2016 under his sole signature and hence take advantage of the minority shareholders’ discount. One resolution had the effect of amending the articles by inserting several new articles. New article 6A provided:

  • “6A The MIN Shareholder may at any time be required to transfer all their shares (“Sale Shares”) to the MAJ Shareholder (“Sale Option”).
  • 6A 1 The MAJ Shareholder may only have the right to acquire the Sale Shares by giving written notice to the MIN Shareholder (“Option Notice”) at any time before the transfer of the Sales Shares to the MAJ Shareholder. The Option Notice shall specify:
  • that the MIN Shareholder is required to transfer all Shares pursuant to this Article 6A,
  • the consideration payable for the Sale Shares which shall be for fair value, and
  • the proposed date of transfer (“Transfer Date”) which shall be such date as the MAJ Shareholder may specify.”

After article 6A was adopted, MAJ wrote to MIN saying that he wished to exercise the option to acquire all of MIN’s shares. MAJ valued consideration for the shares at £175,000. MIN did not sign or return the stock transfer form. MAJ, however, with 75% of shares could still execute the transfer form, and did so on 30 August 2016.

The parties eventually used a third party, a chartered accountant, to value the Company and report on the appropriate minority shareholders’ discount to be applied, based on a sale in the open market on the transfer date. The chartered accountant concluded that the company was worth £2.18 million, so that on a pro-rata basis MIN’s 24.99% shareholding was worth £545,000. Applying the minority shareholders’ discount was deemed to mean a 55% discount and so it was calculated that MIN should receive £245,000.

Re Euro Accessories – High Court decision

The court dismissed MIN’s petition against the chartered accountant’s assessment and therefore deemed £245,000 to represent ‘fair value’. It gave a number of reasons for this. Most importantly the court highlighted the importance of interpreting articles of association on the “natural and ordinary meaning of the words used” and any facts about the company that would be reasonably ascertainable by any reader of the company’s constitution or public filings at Companies House. Therefore, the background to the relationship between MAJ and MIN including the breakdown in their relationship were irrelevant. All the court could do was interpret the wording in the updated articles of association and conclude what ‘fair value’ would mean. Even though the circumstances around which MAJ passed the special resolution to amend the articles was, given the background, clearly prejudicial against MIN.

The courts relied upon the principle established in Short v Treasury Commissioners [1948] 1 KB 116 and recently reaffirmed in Shanda Games Ltd v Maso Capital Investments Ltd [2020] UKPC 2 that MIN could not insist on being paid something to which his shares did not entitle him to and that he did not own. Therefore, MIN could not insist on payment for a proportionate part of the controlling stake which MAJ thereby built up, or a pro rata part of the value of the company’s net assets or business undertakings. The economic concept of minority shareholders’ discount applied because nothing in the articles of association suggested it would be otherwise.

Interpretation of articles of association

In Cosmetic Warriors Ltd v Gerrie [2017] EWCA Civ 324 it was mentioned that articles of association need to be interpreted in accordance with the ordinary principles of contract law. This was why it was hard for MIN to argue that the High Court should imply any other principles outside of the wording in the articles, given that English contract law is predicated on the concept of contractual certainty. With contracts, and therefore articles of association, the court is looking at:

  • “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, which it does by focusing on the meaning of the relevant words in their documentary, factual and commercial context;
  • meaning must be accessed considering (as set out in Arnold v Britton [2015] AC 1619, by Lord Neuberger PSC at paragraph 15):
  • “the natural and ordinary meaning of the clause,
  • any other relevant provision of the contract,
  • the overall purpose of the clause and the contract,
  • the facts and circumstances known or assumed by the parties at the time that the document was executed, and
  • commercial common sense, but
  • disregarding subjective evidence of any party’s intentions.”

It was on this point (f) that MIN failed to convince the court that MAJ’s prejudicial reason for changing the articles of association was an admissible piece of evidence. All the court could do was look at the less subjective elements of the dispute. However, it is also important to highlight the difference between articles of association and contracts. This includes:

  • Articles of association can be altered by a special resolution without the consent of all the contracting parties.
  • Articles of association are not undermined (defeasible) on the grounds of misrepresentation, common law mistake in equity, undue influence or duress or rectification on the grounds of mistake. Therefore, it could be argued, minority shareholders have less principles (than in contract law) beyond the scope of the wording of the articles to rely on.
  • It is not permissible to imply into articles of association a term based on extrinsic evidence of surrounding circumstances. This is because, as stated in Bratton Seymour Service Co Ltd v Oxborough [1992] B.C.C. 471, ‘the consequence would be prejudicial to third parties, namely, potential shareholders who are entitled to look to and rely on articles of association as registered’.

Minority shareholders’ discount – valuation of shares on sale

In Short v Treasury Commissioners [1948] (referred to above) the issue was whether the Crown could acquire individual minority share tranches of the company it was acquiring at a discount. The Court of Appeal held the individual shareholders were not entitled to the pro rata value of their shareholdings. This became the precedent upon which minority shareholder’s discount was based. It was reaffirmed recently in Bratton Seymour v Oxborough (mentioned above) when Lady Arden stated:

“In the opinion of the Board, it is a general principle of share valuation that (unless there is some indication to the contrary) the court should value the actual shareholding which the shareholder has to sell and not some hypothetical share. This is because in a merger, the offeror does not acquire control from any individual minority shareholder. Accordingly, in the absence of some indication to the contrary, or special circumstances, the minority shareholder’s shares should be valued as a minority shareholding and not on a pro rata basis.”

Here to help

The ruling in Re Euro Accessories confirms that minority shareholders should be extra cautious where articles of association allow for the acquisition of shares at fair value. The case hinged on the fact that ‘fair value’ was not defined in the articles and so the courts held that a minority discount would be applied (not pro rata value). It is therefore in the interests of minority shareholders to try and define it. They should also aim to include a provision, as is widely practised, which states that there will be no discount for transfer of minority holdings. Getting legal advice around any articles of association you sign up to or any shareholders agreement you agree to, is going to be important.

EM law specialises in corporate law. Get in touch if you need advice on articles of association, shareholders agreements or have any questions about minority shareholders’ discount.