Corporate Law Update: 29 January - 4 February 2022

04 February 2022

In this week’s update: an interim report from Industry Working Group on electronic execution of documents, the Government announces its proposed “Brexit Freedoms Bill”, time was of the essence in a contract for the supply of goods and a few other items.

Industry Working Group publishes interim report on electronic signing

The Industry Working Group on electronic signing has published an interim report on the status of electronic execution of documents, including best practice when signing documents electronically and recommendations for future reform.

The Working Group was convened following the Law Commission’s recent report on electronic execution of documents. Its main purpose is to consider how different technologies can be used to promote electronic signing and to issue best practice for using electronic signatures.

At this stage, the Working Group has not addressed international issues relating to electronic signatures. It will deal with this in its final report, which it intends to publish later in 2022.

The interim report covers both legal and technical aspects of electronic signing. We have set out below the key legal aspects of the report.

The Working Group’s view on “best practice”

The report provides the Group’s views on best practice when executing a document electronically. The report addresses only execution under the law of England and Wales (which form a single legal jurisdiction) but notes its hope that other devolved administrations (namely, those in Northern Ireland and Scotland) will also adopt its recommendations.

The Group’s best practice guidelines are aimed at both legal professionals (whether in private practice or in-house) and businesspeople.

  • Agree the procedure for executing the document as early as possible in the transaction. Separately, a working group of knowledge lawyers has, for this purpose, prepared an electronic signing checklist for corporate and commercial transactions, which can be adapted by parties to an electronic signing to establish how it will be conducted.
  • Decide on the category of electronic signature they wish to use following the terminology in the EU Electronic Identification, Authentication and Trust Services Regulation (eIDAS), which continues to apply in the UK in modified form. The three categories are “qualified electronic signature” (QES), “advanced electronic signature” (AES) and “simple signature”.
  • Use a signing platform with minimum security and functionality specifications and a strong audit trail to demonstrate the signatories’ intention to sign. As a minimum, this should allow signatories to download and retain the final executed documents.
  • Consider whether additional evidence is appropriate to record the fact that a signatory is approving the document.
  • Where possible, provide multiple options to vulnerable signatories so that they can adopt a method of signing that suits their needs.
  • Authentication should be easier for those with secure digital identities, but this should not be essential.

What is the Working Group recommending going forward?

The Group has set out several recommendations throughout its report that are designed to embed electronic signing further in business and legal transactions.

  • Digital identities should be made available as a matter of priority to all members of society who wish to have one.
  • A combination of qualified electronic signatures and digital identities could be used to fulfil the current function of a person physically witnessing a signature and signing an attestation. There is also no reason why remote witnessing (for example, by videoconference) should not be permitted, but legislation is required to achieve this.
  • The Group notes that the take-up of qualified electronic signatures is currently low and that this may be due to the complex concepts surrounding them. It recommends more accessible guidance on qualified electronic signatures to encourage greater adoption.
  • With the rise of smart contracts, the goal of showing that electronic execution can be undertaken simply and effectively is ever more important.
  • There should be a cross-border database of permissible regulatory and execution modes, starting with “major trading partners”.
  • The Group supports the development by the Department of Culture, Media and Sport of a trust framework, which it believes will facilitate the use of electronic signatures.
  • Temporary provisions allowing individuals to witness the execution of a will through remote means (such as videoconference) should be extended permanently.
  • The Government should take steps to adopt electronic signatures in its transactions with third parties. It should also ensure that documents which the public may need to execute (such as wills and lasting powers of attorney) can be signed electronically. (In some instances, this will require legislation to alter the existing legal position.)

What happens next?

The Working Group intends to publish its full report later in 2022. In the meantime, organisations and advisers should review the best practice guidelines in the report when considering embarking on an electronic signing.

Government announces new “Brexit Freedoms Bill”

The UK Government has announced it intends to bring forward legislation – in the form of what has been dubbed a “Brexit Freedoms Bill” – to make it easier to amend EU legislation that continues to apply in the United Kingdom – so-called “retained EU law”.

What is “retained EU law”?

The UK left the European Union on 31 January 2020, although it continued to be treated for most intents as a member of the EU during a “transition period”. The transition period ended on 31 December 2020, at which point EU law ceased to apply directly in the UK.

However, under the European Union (Withdrawal) Act 2018, all EU law that applied in the UK at the end of the transition period was automatically imported directly into UK domestic law. This was to ensure continuity and to prevent huge gaps in UK law that had previously been filled by EU regulations and case law. This imported law is known as “retained EU law”.

In the context of corporate law, this includes important pieces of legislation such as the Prospectus Regulation, the Market Abuse Regulation and the General Data Protection Regulation (GDPR).

The Withdrawal Act gives the Government power, by regulations, to amend retained EU law to correct any deficiencies in it. However, the Government cannot use this power to extend or reduce the scope of obligations or protections under retained EU law, nor simply to implement policy changes.

The Withdrawal Act also preserves the supremacy of retained EU law over UK domestic law. This can result in courts needing to interpret UK laws made before 31 December 2020 in accordance with EU law and to give preference to EU law if there is a conflict.

What is the Government proposing?

Alongside its announcement, the Government has published a new policy document outlining steps the Government intends to take following Brexit.

The announcement and policy document state that the Bill would extend the purposes for which the Government can amend retained EU law. They do not provide much detail beyond noting that any new power would be “targeted” and “provide a mechanism to allow retained EU law to be amended in a more sustainable way to deliver the UK’s regulatory, economic and environmental priorities”.

However, the paper does state that the Government would be able to use domestic secondary legislation to amend retained EU law “to ensure that key industries do not wait decades for simplified, agile regulation”. This suggests the Government would be able to make a greater range of changes – including policy changes – to retained EU law without Parliament needing to pass primary legislation.

Ultimately, the paper suggests that this could be used to remove any duplication across retained EU and UK law and to remove completely any retained EU law that is “not right for the UK”.

The Bill would also “end the special status that EU law still enjoys in our legal framework”. Again, the Government has not provided much detail, but the paper states that this would “provide an opportunity to consider creating a bespoke rule that would address cases where retained EU law came into conflict with domestic law”. This might allow courts to rule that UK domestic law overrides any conflicting retained EU law that has not yet been removed from the UK’s statute books.

What happens next?

We will need to see exactly what any new legislation says to understand the precise implications for the UK’s legal landscape moving forward. The new Bill will need to be brought before Parliament and debated in the usual manner before it can become law. We will provide more details in due course when the content of the Bill becomes clear.

Time was of the essence in PPE equipment delivery contract

The High Court has held that the buyer of personal protective equipment (PPE) was entitled to terminate the supply contract when a delivery was made late, because time was of the essence. The decision is a useful reminder of when delivery will amount to a condition of a contract.

What happened?

Pharmapac (U.K.) Ltd v HBS Healthcare Ltd [2022] EWHC 23 (Comm) concerned a contract under which Pharmapac agreed to buy PPE from HBS for onward supply during the Covid-19 pandemic. HBS had arranged to procure the PPE from production facilities in India.

The contract took the form of an email exchange worded in very informal terms. The relevant terms of the contract read as follows:

“5M masks at £0.30 per mask based on meeting the product specification and quality of the sample received.

1st 500K shipment will be available for inspection and collection on Monday 16th March.

Followed by 9 further weekly shipments. Please can you ensure that we receive shipping documents 2/3 days before goods are due to arrive so we can then raise invoices with our customer?”

The first shipment was delivered on time. However, the following shipments were all delayed when the Government of India imposed restrictions on the export of face masks out of India.

Pharmapac claimed that “time was of the essence” of the contract and so purported to terminate it and withheld payment. HBS argued that the contract did not state that time was not of the essence and that Pharmacare was not, therefore, entitled to walk away from the arrangement.

What does “time is of the essence” mean?

Broadly speaking, it is possible to divide obligations in an English-law contract into three types: conditions, warranties and innominate terms. These differ in the form of remedy a contract party can claim if the other party breaches the obligation.

If one party breaches a warranty, usually all the innocent party can do is claim contractual damages. It may be possible to obtain an injunction to prevent a breach or to bring a stop to any non-compliance, or to obtain “specific performance” to force the delinquent party to perform their obligations. But the innocent party is not entitled to walk away from the contract.

However, if a party breaches a condition, the innocent party is entitled to walk away from the contract (in legal terms, to treat it as “repudiated”) in addition to claiming damages.

Innominate terms (or intermediate terms) are obligations that can act like a warranty or a condition, depending on the severity of the breach. If the breach is of a kind and has an effect that is sufficiently material, the innocent party will be able to walk away from the contract.

Where time is of the essence of a particular obligation (as can be the case with an obligation to supply goods or services or serve a notice), the obligation will be treated as a condition. If a party fails to fulfil the obligation promptly or by the time stipulated, the innocent party will be able to terminate the contract.

When deciding whether time is of the essence, the courts will look at the wording of the obligation in question. If the contract does not explicitly state that time is of the essence, the courts will look at the contract as a whole and the background to it. With a contract for the sale of goods, for example, this might include where the goods are perishable.

What did the court say?

The court said that time was of the essence in this case.

Although the contract did not explicitly state that time was of the essence. However, the judge said that several background matters indicated that the parties had intended it to be read that way:

  • The face masks were not perishable, but against the background of the pandemic, there was an urgent commercial need to acquire them with a view to selling them on.
  • There was a shortage of PPE. Both Pharmapac and HBS recognised a gap in the market and were trying to fill it. They knew that prices for PPE were volatile, given the scramble for supply.
  • The email indicated a rapid start and short intervals (“weekly”) for deliveries.

Separately, the judge noted that the word “weekly” was vague and didn’t set an explicit regular time for delivering the PPE. Given that the contact could easily have set specific delivery dates but had not done so, the natural interpretation was that HBS was entitled to deliver the further shipments at any point in each successive week.

What does this mean for me?

The decision shows the need to draft commercial contracts carefully and (in particular) to set out any stipulations as to timing (be it for deliveries or otherwise) in detail.

The informal email contract in this case was clearly a product of the circumstances and, perhaps, the parties’ desire to act quickly. However, where at all possible, it is always preferable to set contractual arrangements out formally and in a sensible level of detail.

It is worth asking oneself certain questions when drafting a contractual obligation.

  • When does the obligation need to be performed? If the obligations are to be performed on a repeated basis, the contract should specify as precisely as possible when this is to occur. Rather than using terms such as “weekly”, “monthly” or “quarterly”, it is better to provide a precise day or date (for example, “on Monday each week” or “on 31 January and 30 June in each calendar year”).
  • Is it worth specifying a deadline? In some cases, there may be some flexibility or deliberate vagueness on the timing for performing an obligation. For example, a party may be required to take some action “as soon as reasonably practicable”. There is always value in setting an ultimate long-stop date for that action (for example, “… and in any event by …”).
  • What is the consequence of not complying? Specifying that time is of the essence of an obligation will allow an innocent party to walk away if there is a breach. But often it is better to set out the specific consequences of a breach. As well as (or instead of) ending the contract, this could (depending on the obligation) include triggering a price reduction or a specific determination mechanism.

Other items

  • EDC to track ESG data within the PE/VC industry. The British Private Equity and Venture Capital Association (BVCA) has announced that the European Data Cooperative (EDC) intends to track certain environmental, social and governance (ESG) data within the private equity and venture capital industries. Topics on which the EDC will collect information include climate change, female under-representation and bribery and corruption. The BVCA intends to be able to comment publicly on the data in mid-2022.
  • PRI publishes report on ESG in the VC industry. The Principles for Responsible Investment (PRI) has published a report exploring the development of environmental, social and governance (ESG) issues in the venture capital industry. The report focusses on current approaches to ESG within the VC industry, significant barriers to mainstream adoption of ESG measures, and steps the PRI proposes to take next to contribute to promote an understanding of responsible investment within the VC sector.
  • FRC publishes research on audit committees’ approach to audit quality. The Financial Reporting Council has published a report on audit committee chairs’ views on and approach to audit quality. The report sets out the findings from a survey conducted by YouGov and contains a comparison against its 2020 survey.
  • QCA and Peel Hunt publish Investor Survey 2022. The Quoted Companies Alliance and Peel Hunt have published their 2022 Investor Survey. The report captures the findings of a survey of over 240 fund managers and small and mid-cap quoted companies on their perspectives on the UK equity markets. It focusses on the attractiveness of the UK’s public equity markets, investor priorities and companies’ challenges, ESG funds and corporate governance, and retail investors.
  • FRC publishes 2022 financial reporting standards. The Financial Reporting Council has published new editions of various financial reporting standards (FRS). These include FRS 101 (Reduced Disclosure Framework), FRS 102 (UK and Republic of Ireland), FRS 104 (Interim Financial Reporting) and FRS 105 (Micro-entities).

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