Corporate Law Update: 19 - 25 June 2021

In this week’s update: Draft legislation is introduced to impose greater penalties for deficient modern slavery statements, the FCA is consulting on extending climate reporting to standard-listed companies, an exclusion clause in a supply contract was unenforceable because it was unreasonable, HMRC is retiring its physical stamp presses, the FCA is to restrict the ability of authorised firms to approve financial promotions and a company did not become a different legal entity when it converted into a registered society.

• Draft legislation is introduced to impose greater penalties for deficient modern slavery statements
• The FCA is consulting on extending climate reporting to standard-listed companies
• A clause excluding liability in a supply contract was unenforceable because it was unreasonable
• HMRC is to retire its physical machines used to administer stamp duty
• The FCA is to restrict the ability of authorised firms to approve financial promotions
• A company did not become a different legal entity when it converted into a registered society

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Legislation introduced to toughen modern slavery statements

New legislation has been introduced into the House of Lords designed to toughen sanctions on organisations for failing to publish an accurate modern slavery statement.

Under section 54 of the Modern Slavery Act 2015, commercial organisations that supply goods or services, do business in the UK and have a global turnover above £36m are required to publish an annual statement of steps they took during the preceding year to eradicate modern slavery in their organisation and supply chains.

This statement is technically termed a "slavery and human trafficking statement", although colloquially it is common to refer to it as a "modern slavery statement" or a "section 54 statement".

There is currently no specific penalty for publishing a false or inaccurate modern slavery statement.

To address this, the Modern Slavery (Amendment) Bill would amend the Act by inserting a new section 54ZA, which would have the following effects.

• A person who is responsible for a slavery and human trafficking statement would commit a criminal offence if information in the statement is false or incomplete in a material particular, and the person either knew it was or is reckless as to whether it was.
• For these purposes, the person responsible for the statement would be each of the directors (if the organisation is a company) or each of the partners or members (if it is a partnership or a limited liability partnership).
• It would be a defence if the person responsible took all reasonable steps to ensure that the statement was corrected and informed the Independent Anti-slavery Commissioner as soon as possible.
• The penalties for committing an offence would be severe. On summary conviction, the penalty in England or Wales would be imprisonment for up to 12 months, a fine or both. On conviction on indictment (for more serious offences), the penalty would be up to two years' imprisonment and/or a fine equal to 4% of the commercial organisation's turnover (up to a maximum of £20m).

The Bill has been introduced as a Private Members' Bill, rather than by the Government, and so may well not pass into law. However, the Government has previously signalled that it intends to bring in changes to strengthen modern slavery reporting, including by mandating reporting in certain areas and imposing a new single reporting deadline. It is not impossible, therefore, that the Bill will attract support.

FCA consults on climate reporting by standard-listed companies and ESG topics

The Financial Conduct Authority (FCA) has published a consultation on extending mandatory climate reporting to companies listed on the standard segment of the Official List.

The consultation also seeks views on environmental, social and governance (ESG) topics generally.

Following recent changes made by the FCA, premium-listed commercial companies are now required, for financial years beginning on or after 1 January 2021, to comply or explain against the recommendations and recommended disclosures in the Final Report of the Task Force on Climate-related Financial Disclosures (the TCFD Recommendations).

In summary, these new obligations require a premium-listed commercial company to:

• state whether it has made disclosures consistent with the TCFD Recommendations in its annual financial report;
• if those disclosures sit outside the annual financial report, state where they can be found and explain why they have not been included in the annual financial report;
• if it has not disclosed against a TCFD Recommendation, explain why and set out the steps it plans to take to do so in the future;
• in making its disclosures, take into account the guidance annexed to the TCFD Recommendations; and
• as a general overriding principle, consider whether its disclosures provide sufficient detail to enable readers to assess its exposure and approach to climate-related issues.

For more information on the requirements for premium-listed commercial companies, see our previous Corporate Law Update.

The FCA is proposing to apply precisely the same requirement to companies with equity securities listed on the standard segment of the Official List. The requirement would not apply to standard-listed investment companies and shell companies.

The FCA is also seeking views on whether the reporting requirement should also be extended to:

• companies with a standard listing of global depositary receipts (GDRs) or shares other than equity shares; and
• companies with a standard listing of debt and debt-like securities.

As with the existing rules for premium-listed commercial companies, the proposed rules for standard-listed companies would operate on a "comply or explain basis". They would apply to financial years beginning on or after 1 January 2022.

Standard listings are currently much less common than premium listings. Standard listings are, generally speaking, less stringently regulated than premium listings and so lack the prestige of a premium listing. However, the proposals need to be seen in light of recent proposals (following the independent review chaired by Lord Hill) to overhaul the UK's listing regime. One of the proposals coming out of that review was to "reposition" the standard listing segment and promote it more effectively, including by renaming and "rebooting" it. See our previous Corporate Law Update.

Separately, the FCA is considering the integration of wider ESG matters in UK capital markets as part of reviewing the effectiveness of primary markets. To inform its ongoing policy work, the FCA is looking to generate discussion and engage stakeholders on issues relating to green, social and sustainability-labelled debt instruments and on ESG data and rating providers.

The FCA has asked for views by 10 September 2021.

Clause excluding liability failed "reasonable test" under UCTA

The High Court has held that an exclusion clause in a supplier's standard terms was ineffective because it failed the "reasonableness" requirement in the Unfair Contract Terms Act 1977.

What happened?

Phoenix Interior Design Ltd v Henley Homes plc [2021] EWHC 1573 concerned a contract for interior design services and certain goods in connection with refurbishing a hotel in the Scottish Highlands.

The supplier's contract stated that it was subject to terms and conditions "overleaf". However, at the point at which the contract was finalised, the terms and conditions were not overleaf, nor had they been attached to the contract.

One of the supplier's standard terms stated: "The Seller shall be under no liability under the above warranty (or any other warranty, condition or guarantee) if the total price of the Goods has not been paid by the due date for payment." In other words, it attempted to excuse the supplier completely of any liability if the customer failed to pay for any goods supplied.

A dispute subsequently arose as to whether some of the goods and services supplied had been defective. The customer withheld the balance of the purchase price that remained to be paid. As a result, the supplier attempted to rely on the exclusion clause described above.

The customer argued that the exclusion clause was ineffective for two reasons:

• first, the supplier's standard terms and conditions (including the exclusion clause) had not been incorporated into the contract, because they did not appear "overleaf" (as stated in the contract); and
• secondly, if the exclusion clause was incorporated into the contract, it was ineffective because it was not reasonable under the Unfair Contract Terms Act 1977 ("UCTA 1977").

Liability for goods supplied in the course of a business is governed by a combination of the Sale of Goods Act 1979 ("SGA 1979") and UCTA 1977.

Under the SGA 1979, where a person is selling goods in the course of their business, the contract automatically contains certain "implied warranties" in relation to those goods. These include that the goods will correspond with any description (section 13) or any sample (section 15) and that they will be "of satisfactory quality" (section 14). (The SGA 1979 does not apply to consumer contracts, which are regulated instead by the Consumer Rights Act 2015.)

UCTA 1977 regulates clauses in commercial contracts that attempt to exclude or limit a party's liability. Among other things, UCTA states the following:

• where a party is dealing on its standard terms of business, it cannot exclude liability for failing to perform the contract, or render substantially different performance, except in so far as the exclusion satisfies the test of "reasonableness" (section 3(2)(b), UCTA 1977);
• a person selling goods in the course of a business cannot exclude or restrict its liability for breach of the warranties implied by sections 13, 14 and 15 of the SGA 1979, again except in so far as the exclusion or restriction satisfies the test of "reasonableness" (section 6(1A), UCTA 1977);
• for the purpose of section 3, a term is "reasonable" if it was fair and reasonable having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made (section 11(1), UCTA 1977); and
• for the purpose of section 6, whether a term is "reasonable" is judged by reference to various matters set out in Schedule 2 to UCTA 1977 (section 11(2), UCTA 1977).

What did the court say?

The judge found that the supplier's standard terms (including the exclusion clause) had been incorporated into the contract. However, the exclusion clause was ineffective because it had not been reasonable.

The supplier had previously supplied its standard terms to the customer, both in hard copy and by email. Although those terms had not been "overleaf" or attached to the contract, the contract did state that it was expressly subject to the terms and conditions. A reasonable person would have concluded that this obviously referred to the terms previously provided to the customer.

When considering whether the exclusion clause was reasonable, the judge noted that the burden was on the supplier to show that the exclusion clause was reasonable. However, the supplier had failed to do so for various reasons.

• The exclusion clause was unusual. It was different from a clause preventing the customer from setting any claims off against the purchase price, which would have been more common and which would have sufficed in place of the exclusion clause.
• The clause had not been highlighted to the customer. Rather, it had been "tucked away in the undergrowth" and its consequences were "not obvious".
• The consequence of even the slightest delay or deduction would have been potentially "exorbitant", as it would have barred all rights of redress against the supplier.
• It was difficult to apply the exclusion clause, because the contract did not stipulate a due date for paying the balance of the purchase price. This made it impracticable for the customer to comply without having to pay under protest to avoid the exclusion clause applying.
• This was particularly relevant, because one of the criteria in UCTA 1977 when deciding whether a clause is reasonable is where the term "excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable". In this case, at the time the contract was agreed, the difficulty in identifying the date for payment made the payment terms impracticable.

Although the court found that the exclusion was unenforceable, the supplier was able to recover almost all of the remaining contract price on other grounds.

What does this mean for me?

The decision shows the importance of ensuring that any term purporting to limit or exclude liability in a contract that is subject to UCTA 1977 meets the test of "reasonableness" under that Act.

It is impossible to set down prescriptive rules to ensure reasonableness, as a given limitation or exclusion will be considered in its contractual and factual context. However, to increase the chance of an exclusion or limitation being reasonable, a party can take various steps.

• Bring the exclusion to the other party's attention. The more obscure or hidden away the exclusion or liability is, the more likely it will be unreasonable.
• Ensure that the exclusion is not disproportionate. In this case, excluding the supplier's liability entirely merely because the customer failed to pay part of the price went further than the court felt was acceptable.
• Make sure it is possible to determine when the exclusion will apply at the time the contract is made. If the exclusion is to come into effect because the other party does not comply with a condition of the contract, make sure that condition is measurable.
• More generally, test the exclusion against the criteria in Schedule 2 to UCTA 1977. Although those criteria are not exhaustive, the more of them the exclusion satisfies, the more likely it is to be reasonable and, therefore, enforceable.

Also this week...

• HMRC to decommission physical stamping machines. HM Revenue & Customs (HMRC) has confirmed via a website announcement and an official Gazette notice that it will be decommissioning its physical stamping machines ("presses") with effect from 19 July 2021. The decision follows HMRC's announcement in May this year that the temporary procedure for paying stamp duty electronically during the Covid-19 pandemic has now been made permanent (see our previous Corporate Law Update). HMRC will retain three of the presses and install them in newly-created regional centres, and is now searching for suitable institutions that might be keen to house on one of the five remaining presses to preserve them for their historical significance.
• FCA to restrict ability of authorised firms to approve financial promotions. In July 2020, we reported that the Financial Conduct Authority (FCA) was considering measures to limit the ability of authorised firms to approve financial promotions issued by unauthorised persons. The FCA has now published the response to its consultation setting out how it will proceed. In summary, the FCA intends to prohibit all new and existing authorised firms from approving financial promotions by unauthorised persons. A firm will then be able to apply to the FCA to have the prohibition removed entirely (allowing it to approve all types of financial promotion) or partially (allowing it to approve certain types of financial promotion).
• Conversion from company did not create a new legal entity. In Mount Wellington Mine Ltd v Renewable Energy Co-operative Ltd [2021] EWHC 1486 (Ch), the High Court held that, where a company converted into a registered society under the Co-operative and Community Benefit Societies Act 2014, it continued to exist as the same legal entity (albeit subject to a different legal regime). As a consequence, in this case, there had been no assignment of a lease under which the company was a tenant in breach of the lease terms when the conversion occurred.