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Disruptive Asset Finance
Disruptive Asset Finance Autumn 2016
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Why does the reform of EU data protection rules still matter in a post-Brexit world? Welcome
to the first edition of “Disruptive Asset Finance”!Why disruptive? Firstly, we wanted to be disruptive, to do something which is a little different than the many other publications aimed at the Asset Finance space. Secondly, we live in a particularly disruptive time – Brexit, Trump, Artificial Intelligence and the Rise of the Machines – and many of our businesses and the assets we deal with are affected by that disruption. Finally, as hopefully demonstrated by the wide range of contributions to this magazine, Clarke Willmott has a particular expertise with disruptive technologies and disruptive legal issues.
In this our first addition we will look at how disruptive driverless cars are likely to be to the law associated with road accident liability, and you will read about some of the impact which both Brexit and technology is having with the law. For practitioners, our specialist Business Recovery Unit will talk you through setting aside a default judgment, and in our case digest we will bring you up to date with the most relevant recent decisions.
I hope you find DAF both informative and challenging, and we would welcome any feedback and suggestions about topics and articles you would like us to cover in future additions.
John Flint Partner, Clarke Willmott LLP 0345 209 1079 [email protected]
However, it remains unclear what amendments may be made to data protection laws once the UK has left the EU. Of course, leaving the EU does not mean cutting off relations with Europe and so data protection will still be vital to future trading. Therefore, even when Brexit is complete the UK will need new data protection laws in force which are at least equivalent to the GDPR. If the UK remains within the Single Market then EU rules on personal data might continue to apply in full in the UK, but if a different trading relationship is pursued, all EU rules might be replaced with national ones. That said, the UK may end up implementing even stronger data protection laws than the European standard.
Many businesses will need to make changes to comply with the GDPR. Businesses should certainly not halt their preparations for the GDPR because of Brexit - they should be moving forward. This is especially so now we have had confirmation that GDPR will be implemented in May 2018. Time and energy spent preparing for the GDPR will be transferrable to a subsequent scheme. Businesses may need to redesign systems that process personal data, renegotiate contracts and restructure data transfer arrangements. These changes could be time consuming so do not delay in taking action.
For more information, please contact: Susan Hall Partner 0345 209 1498 [email protected]
Just before the UK voted to leave the European Union a new European regulation, the EU General Data Protection Regulation (GDPR), was made into law. It applies from May 2018 and no national laws are needed in order for it to become effective.
The UK’s data protection law certainly needs modernisation. Existing data protection laws have been in place for three decades and the present regime dates from the 1995 Data Protection Directive. Businesses have struggled with compliance issues as various member states have taken different approaches to implementing the 1995 Directive. The GDPR is therefore designed to increase harmonisation across the EU while addressing new technological developments.
Despite the result of the Brexit referendum this new regulation cannot be ignored and businesses must still be prepared for change. The UK has to serve notice of its intention to exit the EU and then it must negotiate a withdrawal agreement before it ceases to be a member of the EU. The Secretary of State, Karen Bradley MP has recently confirmed to the Culture, Media and Sports Select Committee that the UK will be implementing the GDPR in May 2018.
As the Information Commissioner, Elizabeth Denham, recently made clear most digital businesses will have to follow the GDPR to do business where they want to. Organisations (wherever they are located) that process EU citizens’ personal data in connection with their offer of goods or services, or their “monitoring” activities (such as online tracking for marketing purposes) will need to be GDPR compliant - whether that processing takes place within the EU or not. Any business which has a group company or staff operating within the EU will also have to comply with the GDPR’s provisions.
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02 Disruptive Asset Finance Autumn 2016
Driverless cars – who will be responsible for an accident? The arrival of driverless cars on our roads is now inevitable. Testing has already begun in this country and around the world. There are some fascinating collaborative projects between car manufacturers, town planners and high tech companies aimed at delivering a safe product in a safe environment. There is even an insurance policy available in the UK to cover the “driver” of a driverless car against the usual liabilities, which puts us a step ahead of the rest of the world.
After initial speculation amongst insurers and lawyers it now seems to be accepted that although there will need to be extensive regulation concerning the production and use of driverless cars, the existing law relating to liability for accidents is largely sufficient to deal with claims that will arise from the use of such vehicles. The thinking is clear, if the driver is in control at the time of the accident, the driver will be responsible if he has breached his duty of care to fellow road users in the normal way. If the accident occurs when the car is controlled by its on board systems and those systems fail, the manufacturer will be responsible for the accident under existing laws relating to product liability.
That simplistic approach has at least two obvious flaws. The first is the “state of the art” defence to a product liability claim; a technical argument which will be covered in later articles. The second is the question of who bears responsibility if the vehicle is programmed to deliberately collide with another vehicle, a pedestrian or even property?
Why should a manufacturer pre-programme a vehicle to crash? It is here we enter the realms of a moral dilemma and one which has been discussed in forums in the USA. Time for a little homespun philosophical introspection.
Your driverless car could, for example, be programmed never to cross an unbroken double white line in the road and thus to never contravene that aspect of the Highway Code. Yet we all know that in the real world, such unfailing adherence to the law would lead to chaos. You encounter a lorry parked in the carriageway unloading goods in an area where there is a double white line in the middle of the road. As a driver you assess the situation and make a value judgment that you have to cross the white lines in order to go round the lorry and continue your journey. You make a second judgment as to when to do so safely, taking into account the road conditions, volume of traffic, visibility and the reaction of other road users. Unless a driverless car is to sit unmoving at an obstruction, bringing traffic to a halt, it must be programmed to make the same judgment – when is it safe to ignore a rule of the road – and how should it execute the manoeuvre? Many rules of the road are treated as flexible guidelines, it would be impractical to do otherwise. The consequences of breaching a rule must be extreme to make it a rule never to be broken.
Extending the argument, do you programme a driverless car to always stop or take avoiding action rather than collide with a pedestrian? Is that a rule so significant as to be regarded as one never to be breached? What
if the effect of avoiding running down a pedestrian takes the driverless car into the path of an oncoming vehicle, risking collision with that vehicle and death or injury to the occupants of both? Does the driverless car calculate that the potential loss of the life of the pedestrian is a better outcome than the potential loss of life of the occupants of two vehicles? When is one life valued at more than another? Is it merely statistical, would it make a difference if hitting the pedestrian prevented forcing an oncoming bus off the road killing all the passengers? Would it vary the equation if the pedestrian were elderly and the bus full of schoolchildren or the pedestrian a mother carrying a child and the bus full of terminally ill patients?
You may well say that we are now into the realms of the nonsensical but the point is clear: driverless cars will need to be programmed to make judgments. Those judgments are in essence moral judgments. When a human driver is involved in an accident, that driver will make a snap decision on what to do. He or she may have been calm and weighed up the options but the chances are that they will merely act instinctively in a split second on what they see before them. The decision may be wrong or right. A court may judge their conduct after the event and consider them culpable or blameless or possibly apportion blame, with the benefit of hindsight.
If the decision is taken not by the human driver but by the driving system and is the pre-programmed choice of an IT systems engineer, who then is responsible? If it is the manufacturer, should that decision process be subject to the same scrutiny as the human driver? Will the collision not then have occurred as a result of a negligent breach of duty, but a conscious balancing of risks and outcomes? Does the injured party then fail to recover damages on the basis that the driverless car has reacted in such a way that there has been no breach of duty to other road users?
The factual scenario is not new, it is reminiscent of the questions put to law students when studying the law of tort. The possibility that liability might be apportioned between pedestrian, driver or manufacturer may not be novel but the issue of a prescribed decision made in advance controlling the behaviour of one of the active participants in the drama, and that participant being an autonomous vehicle, is undoubtedly new and may well require further jurisprudential consideration than has yet been realised.
Clarke Willmott is leading the way in exploring the legal issues arising from the introduction of driverless cars for the motor industry and the individual.
For more information, please contact: Chris Thorne Partner 0345 209 1461 [email protected]
Is the future of dispute resolution online?
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03 Disruptive Asset Finance Autumn 2016
A revolutionary new online court has been recommended by a senior member of the judiciary in a bid to bring greater access to justice. In his Civil Court Structure Review, published in July 2016, Lord Justice Briggs said that he would recommend an “Online Solutions Court” as part of the Government’s ongoing court reform programme. He has recommended the new court be separate from the County Court and regulated by new simpler court rules.
It is anticipated that the proposed court, which is likely to eventually become mandatory, will deal with all money claims up to £25,000, save for specific exclusions. At first a “soft roll-out” may see the court dealing with claims under £10,000. The level of claims heard by the court and the type of case it will deal with are to be kept under review with sufficiently complex claims being transferred out of the new scheme.
The web based court aims to allow court users to formulate and essentially run their own cases. This is important because often it is not cost effective for a business or individual to consult and retain a lawyer where their case is of a low or moderate value. This is because the ongoing costs of consulting a lawyer are likely to outweigh the value of the case and may not be recoverable even if the case is won. That is frustrating because often the amounts in dispute are not insignificant sums.
The proposed court will give court users access to basic legal principles and, following an initial exchange between the parties, to determine whether there is actually a dispute, the case can proceed to be issued at court. The litigant would then be guided through an analysis of their dispute so to produce a claim document capable of being understood both by their opponent and by the court. After the claim is lodged the court will manage the case and try and assist the parties to resolve their issues. Those cases which do not settle will proceed to be determined. If suited the trial could be by video hearing, telephone hearing or on the documents.
The stages of the new proposed court are not wholly revolutionary. Many of the proposed elements already exist across the court system. However, the prospect of having to create a workable IT system which leads parties though a series of web based investigations to enable them to formulate their case without the need for a lawyer is an enormous task.
Lawyers may still be used for cases in the online court. However, a major economic barrier will be that those who choose to instruct lawyers will not recover the legal costs they incur even if they are successful in their case. Limited exceptions have been suggested so there may be an element of fixed recoverable costs for initial advice or for complex trials.
Even simple cases can raise complex issues. Ensuring that people are not left bewildered will be one element that will be vital to the new court’s success. Instructing a lawyer at the outset will still be important in many cases to fully understand the merits of the case. Further, businesses which have a large volume of smaller claims will have to think very carefully about how their litigation is managed if the online court becomes a reality.
For more information, please contact: Owen Williams Partner 0345 209 1381 [email protected]
John Flint Partner 0345 209 1079 [email protected]
Businesses and consumers may find themselves better placed to resolve their own low value disputes without reference to lawyers in the future.
Case notebook Alexander v West Bromwich Mortgage Company Ltd [EWCA] Civ 496 – Beware of inconsistent terms in your document set
Has your suite of contractual documentation been reviewed recently? This case is certainly a salient reminder of the need to ensure consistency between any standard “small print” and any specific terms such as an offer letter or a cover sheet setting out details.
In this case the Court of Appeal held that a standard term mortgage condition for a “tracker” mortgage was inconsistent with the special conditions contained within the offer letter. The letter said that if there was an inconsistency, the terms in the letter would prevail. The court said the correct approach was to assess whether an inconsistency existed without any pre-conceived assumptions and not strive to avoid or to find inconsistency. The court also referred to the principle that, if there is a conflict, special conditions prevail over general conditions. In addition, printed standard terms must not be construed so as to emasculate the obligations contained within the offer. Here the term in the letter prevailed so that the inconsistent clause in the conditions was not incorporated into the contract. It is reported that the lender is expected to pay out £27.5m to borrowers as a result of this judgment. The lesson is clearly that all documentation which forms part of a contract needs to clearly reflect the intention of the parties.
Finch and another v Lloyds TSB Bank Plc and others [2016] EWHC 1236 (QB) - Duty to voluntarily advise on lending
In this case it was importantly noted that a lender had no tortious duty to voluntarily advise a borrower about the terms of the loan agreement
which might be contrary to its own commercial best interests. It was commented that the circumstances in which such a duty could arise “would have to be exceptional and markedly different from the conventional relationship of banker and customer”, particularly when, as in this case, the borrower was represented by a broker and solicitors. This case strengthens the position of a lender when it comes to the need to advise customers voluntarily on certain specific conditions - a borrower will face hurdles to establish the existence of a duty of care to advise on the terms. That said, some caution is required – this case related to a business customer who had representation. Had the case involved a retail consumer and the case been decided by the Financial Ombudsman the position may have been different.
Templars Estates Ltd v National Westminster Bank PLC [2016] EWHC 2020 (Comm)- Proceedings stayed for a Financial Ombudsman Service complaint
The claimant alleged it was negligently advised by Natwest and RBS and issued proceedings in the High Court. The claimant then applied to the Financial Ombudsman Service (FOS). The court proceedings needed to be stayed so that the FOS could investigate. The bank refused to agree to a stay but the court granted the claimant’s application. If there was not a stay the claimant would be unable to make the more “informal and much more economical” complaint at the FOS. There had been “no sitting on hands” by the claimant and the bank would not be prejudiced by a delay. However, it is noteworthy that the claimant was required to accept the limited jurisdiction of the FOS. If they lost at the FOS they could continue the court proceedings but if they were granted an award the proceedings must be discontinued. An undertaking to this effect was given to the court.
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04 Disruptive Asset Finance Autumn 2016
Brexit: what impact might leaving the EU have on the UK’s asset finance industry?The recent intervention of the High Court, whose decision was unexpected in most quarters, shows the potential folly of making too many predictions about Brexit. It does, however, seem possible to say, with some confidence, that the legal and regulatory matrix (if not the broader context of the health of the domestic economy) governing asset based lending is unlikely to see significant short term change as a result of Brexit.
The context
Subject to the Supreme Court’s ruling on the requirement for a parliamentary vote, which is expected early next year, the government intends to start the process of withdrawing from the European Union in March 2017. This should see the UK leave the EU by the summer of 2019; although that is subject to the potential for an extension and the as yet unexplored issue of whether it would be possible to withdraw from the Brexit process even after notice has been given under Article 50. (Notably, a strong supporter of the view that an Article 50 notice would be revocable is the author of Article 50 itself, the former diplomat Lord Kerr.)
Legislative and regulatory certainty is intended to be achieved under a “Great Repeal Act”, to be brought forward in the next parliamentary session but which will not take effect until the day the UK leaves the EU. Despite its name, the act will add hundreds of EU regulations (which apply directly at national level without the need for domestic legislation) to the UK statute book. That will allow parliament to change and repeal EU law piecemeal, and will presumably aid trade negotiations by allowing the UK to meet a broad equivalence assessment.
Given the government’s confirmation that it will not provide a running commentary on, or allow parliament to “micro manage” negotiations, the likely shape of the UK’s post Brexit relationship with the EU is not clear now, and that is likely to remain the case for some time.
However it is apparent that, in the government’s view, it was not the intention of the 52% to leave the EU only to give up control of immigration or return to the jurisdiction of the European Court of Justice. Set against the message from the rest of the EU that free movement is a precondition for access to the European Single Market (ESM), and Theresa May’s line that commentators are focussing unduly on the nature of the UK and EU association states’ current relationships, there seems to be no prospect of the UK joining the European Economic Area (EEA), and the likelihood that a new form of association will be created.
Regulation
Unless the UK remains a member of the EEA (like the much-vaunted case of Norway) or a special arrangement is negotiated (as is the case with Switzerland), passporting for cross-border asset finance operations will end. Switzerland is particularly notable as, due to the nature of its relationship with the EU (effected by a series of bilateral agreements that require constant renegotiation), it does not have full access to the EU’s internal market for financial services and so tends to operate its banking business by passporting. Often from the UK.
Subject to this, it seems unlikely that an end to the UK’s participation in the ESM will result in wholesale changes to the regulation of UK financial services.
Harmonized EU rules regulating credit agreements are largely confined to “true consumer” contracts, and those parts of the Consumer Credit Act and the FCA’s Handbook that apply to contracts with unincorporated business customers do not reflect EU requirements. Business conduct rules are therefore unlikely to be directly affected by Brexit.
Similarly, although the EU adds additional minimum requirements to the Basel solvency rules, in many areas UK prudential regulation of bank-owned finance companies goes beyond the EU’s minimum requirements, and there is no apparent reason why Brexit should change that. This is subject to the potential loss of the “bonus cap” (implemented under the EU’s Fourth
Capital Requirements Directive), however, which has been criticised by the UK authorities.
Taxation
Whilst EU rules affect a number of features of national tax systems, especially in respect of VAT, it does not seem likely that Brexit will affect many tax areas specifically relevant to asset finance.
For example, arrangements for taxing the private use value of leased business cars for VAT purposes have not been harmonized and vary between Member States. Although Brexit would permit a departure from harmonized VAT rules in other areas, none seems particularly likely.
The EU has recently started to exercise a more limited jurisdiction over national corporate tax systems, focussing principally on apparent breaches of EU “state aid” competition rules in favour of certain multinationals. The UK’s existing approach to corporation tax is to establish low headline rates but add features that can add significantly to the tax burden. This approach does not seem to be challenged by the EU, and so would not obviously be affected by Brexit.
The wider issues
A more pressing issue is the general health of the UK economy.
For now, a weaker currency, and measures introduced by the Bank of England designed to provide additional monetary stimulus, will support short term growth.
Asset finance will also remain a good way for businesses to make capital expenditure affordable; indeed, the extra capital made available due to the Bank of England’s reduction of capital requirements on UK banks will provide liquidity in the banking market for those requiring it.
That however is subject to the principal regulatory issue facing asset finance in the coming years, which is the global adoption of requirements for lessees to capitalize operating lease commitments that are currently off-balance-sheet.
The lessee capitalisation rule will take effect from 2019 in international financial reporting standards (IFRS) (and also in US generally applicable accounting standards), which listed public companies must use under EU law. Although the UK could weaken the requirement for full IFRS compliance for UK listed companies, this seems unlikely, as the UK authorities post-Brexit would be, more than ever, concerned to maintain the country’s global attraction as a base for international companies.
Losing the benefit of off-balance-sheet financing for operating leases could merit reassessments of lease-buy decisions and have a chilling effect on the market.
This is a good example of the fact that, for the asset finance market at least, the focus of concerns following Brexit (and now Donald Trump’s promised “Brexit Plus Plus Plus”) are unlikely to be on the legal and regulatory environment in which the sector operates.
For more information, please contact: Oliver Sainter Associate 0345 209 1197 [email protected]
In discussion with Karen Chapman
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05 Disruptive Asset Finance Autumn 2016
Karen is an associate with the firm and supervisor of our commercial debt recovery team. She has over 12 years of litigation and enforcement experience and is highlighted as being “diligent and conscientious” in the latest edition of The Legal 500. What topical issue do you see being particularly relevant at the moment?
There have been several articles in the media recently, notably the Daily Mail, regarding the impact of County Court Judgments (CCJs) on debtors. These articles have in the main focused on situations where a default judgment has been entered against a debtor following service of the claim form at a former address. The individuals featured in the articles have spoken of their difficulties in obtaining mortgages and other forms of credit because they were unaware that a CCJ had been entered against them.
For the vast majority of creditors, litigation is a last resort following the failure of the debtor to engage with the creditor and the collection process. The current pre-action protocols contained in the Civil Procedure Rules (CPR) require a creditor to send an appropriate letter before action detailing the claim before proceeding with litigation. It is always the case that the goal of the debt recovery process is to obtain payment; a CCJ is simply a tool which assists in achieving this goal.
It therefore appears clear that many of the situations described in recent articles could have been avoided by debtors simply providing their creditors with change of address details.
What does this mean in practice?
The current focus on CCJs could lead to an increase in applications to set aside older default judgments. This makes it the opportune time to consider the circumstances when the court MUST set aside a default judgment and the circumstances in which the court MAY set aside a default judgment.
What are the relevant tests?
In general terms, the court will allow a default judgment when a debtor fails to respond to the claim form. Default judgment is a strictly paper exercise, with no trial or court consideration of the validity of the creditor’s claim.
Once any judgment is entered, it requires a party to make an application to the court to set aside a default judgment.
The court MUST set aside a default judgment if the debtor filed an acknowledgement of service or defence within the time allowed by the CPR. The debtor is allowed 14 days from service of the claim to file an acknowledgement of service or defence. If an acknowledgement of service is filed, the debtor has another 14 days (being a total of 28 days since service of the claim form) to file a defence. In addition, a creditor may not obtain default judgment if the debtor has applied for the creditor’s claim to be struck out or for summary judgment.
The court MAY set aside a default judgment where the debtor has a real prospect of successfully defending the claim; or
i. it appears to the court that there is some other good reason why the judgment should be set aside or varied; or
ii. the debtor should be allowed to defend the claim.
Is there a stricter test for more historic judgments?
This provision does give the court a wide discretion when considering whether to set a default judgment aside. However, the court must have regard to whether the debtor has made the application to set aside judgment promptly. Whilst promptness will not determine the application, if an application is not made promptly, it is less likely to be successful.
What can creditors do to avoid a judgment being set aside?
Related to the above is the issue of service. The CPR states that an individual may be validly served at his usual or last known residence. As such, if good service of a claim form has taken place at a former address, that will not provide the debtor with an automatic ground to apply for the setting aside of a default judgment. They will need to satisfy the court that there are other good reasons for the judgment to be set aside.
However, creditors must be careful when serving at a last known address. In order for there to be good service, if the creditor has any reason to believe that the address which they are proposing to serve the Claim Form is an address at which the debtor no longer resides, the creditor must take reasonable steps to try and ascertain the address of the debtor’s current residence. Reasonable steps may include obtaining a trace report.
Good service therefore limits the possible grounds for the setting aside of a default judgment.
And if a creditor is faced with an application to set a judgment aside…?
Given the court’s wide discretion in these matters, a creditor dealing with an application to set aside judgment will have many issues to consider, not least the issue of costs. Courts will often allocate a minimum amount of time to deal with set aside applications. This can result in judgments being set aside simply because the court does not have the time to properly consider the arguments. It is not uncommon for a judgment to be set aside simply because a judge concludes that a debtor who has submitted ‘War and Peace’ volumes of paperwork must have at least one “good reason” somewhere! In these situations it is easier for the judge to balance the interests of justice by allowing a full hearing of the facts to take place.
Creditors are therefore advised to take legal advice when dealing with applications to set aside judgment as it can be more cost effective to consent to the application, particularly if the facts of the case are more complex than usual.
For more information, please contact: Karen Chapman Associate 0345 209 1673 [email protected]
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Clarke Willmott LLP is a limited liability partnership registered in England and Wales with registration number OC344818. Authorised and regulated by the Solicitors Regulation Authority (SRA number: 510689), whose rules can be found at www.sra.org.uk/handbook. Its registered office is 138 Edmund Street, Birmingham, West Midlands, B3 2ES. Any reference to a ‘partner’ is to a member of Clarke Willmott LLP or an employee who is a lawyer with equivalent standing and qualifications and is not a reference to a partner in a partnership. The articles in this briefing are not intended to be definitive statements of the law but instead provide general guidance.
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