The senate of the Netherlands has recently adopted a bill that protects private undertakings against unfair competition of public authorities (and public enterprises) conducting business activities. The bill imposes several rules of conduct on these public authorities. This article looks at the background to these changes and discusses the way in which the rules of conduct will be enforced in the Netherlands. Continue reading “Competition rules for Dutch public authorities”

In IHL174 Charlotte Bunn commented that the concept of repudiatory breach of contract, and its effects, are commonly misunderstood (p8). The recent Court of Appeal decision in Acre 1127 Ltd (In Liquidation) v De Montfort Fine Art Ltd [2011] should therefore be welcomed in so far as it is a reminder of the distinction between repudiatory breach and non-repudiatory breach of contract, and the circumstances in which the ‘innocent’ party will not be able to recover damages pursuant to the repudiatory breach. Continue reading “A clearer picture of entitlement to damages flowing from repudiatory breach?”

Consumers in the Middle East and North Africa (MENA) are much the same as consumers anywhere else in the world; they enjoy the chance of getting something for nothing. So, not surprisingly, brand owners are as keen here as they are elsewhere in the world to use promotional giveaways and prize draws to attract consumer attention and drive sales. Continue reading “Advertising and promotion law in the MENA region”

Does your organisation sponsor a defined benefit (DB) pension scheme? If it does, it will be responsible for making up the deficit in the scheme. It therefore has a direct interest in how the scheme’s investments perform.

One difficulty for a sponsoring employer is that it is one step removed from the decision-making process on investments: the assets of the scheme will be held on trust and invested by the trustees, not by the employer. Continue reading “Alternative investments by DB pension schemes: the employer’s perspective”

Following some years of vocal agitation by media organisations and interest groups, on 15 March 2011 the Ministry of Justice published its draft Defamation Bill, the first proposal for wholesale statutory reform of our libel laws since the Faulks Committee’s (aborted) proposal in 1972. The draft Bill is based in part on Lord Lester’s private member’s bill published in June 2010, but with some crucial differences, including, very sensibly, the absence of a restriction on a company’s right to sue. In this briefing, the authors critically analyse the substance of the draft Bill with suggestions for improving the Bill to ensure properly balanced reform. Continue reading “Libel reform: the proposed changes”

Prior to discussing misrepresentation it is important to understand the structure of the legal system in the UAE.¹

UAE LEGAL SYSTEM

The UAE shares a similar civil law structure to many other Arab countries. After the formation of the federation in 1971, the UAE looked towards Egypt for the drafting of its major codes. Egyptian legal experts thus heavily influenced the legislative process in the UAE and, even today, many years after the formation of the federation, UAE courts still look to Egyptian authorities for guidance in matters that are unclear under UAE laws. As in all civil law jurisdictions, the UAE is governed by several statutory codes, which regulate the civil and commercial relationships between natural and legal persons doing business in the UAE.

DEFINITION AND INTERPRETATION

Misrepresentation in the UAE is governed by Federal Law No 5 of 1985 in respect of the Civil Transactions Law (Civil Code).

Articles 185-192 of the Civil Code define the concept of misrepresentation, set out its purpose, and provide for its terms and conditions.

Articles 185-186 of the Civil Code define misrepresentation as follows:

‘Article 185: Misrepresentation is when one of the two contracting parties deceives the other by fraudulent means by word or act which leads the other to consent to what he would not otherwise have consented to.
Article 186: Deliberate silence concerning a fact or set of circumstances shall be deemed to be a misrepresentation if it is proved that the person misled thereby would not have made the contract had he been aware of that fact or set of circumstances.’

Accordingly, misrepresentation or deception implies the existence of fraudulent means, which has led to the consent of the other party to enter into a transaction. UAE law does not recognise negligent misrepresentation. To the contrary, as Articles 185-186 confirm, there must be an intention, deliberate action or inaction to deceive by fraudulent means. The victim of misrepresentation therefore bears the burden of proof in establishing that:

1. they were deceived by the misrepresentation; and
2. that the deception was intentional.

This brings into issue the way in which the concept of fraudulent means is viewed in the context of professionals. Simply stated, there are no fraudulent means unless the instance is so serious that it goes beyond what a reasonable, experienced professional, would expect. In practice, professionals tend to have a limited and restricted interpretation of fraudulent means.

LEGAL CONSEQUENCES OF MISREPRESENTATION

Article 187 of the Civil Code sets out the legal consequences of misrepresentation under UAE Law:

‘If one of the contracting parties makes a misrepresentation to the other and it transpires that the contract was concluded with gross unfairness (lésion – emphasis added), the person so misled may cancel the contract.’

Article 187 demonstrates that the Civil Code views misrepresentation as a defect to the consent of the contracting parties. In instances where misrepresentation is established by the victim, the element of consent is vitiated or defected. Consent, capacity of the contracting parties, the subject of the contract and its cause, are the essential elements of the contract and its pillars, and when one of these elements is deemed defective or missing, the contract collapses and accordingly the contract can be terminated or nullified, depending on which essential element is defaulting. Misrepresentation under UAE law serves as grounds for termination.² However, misrepresentation, on its own, is not grounds for compensation as it is not deemed a breach of contract.

TERMINATION

Article 187 of the Civil Code indicates that UAE Law interprets ‘misrepresentation’ and ‘lésion – gross unfairness’ conjunctively and cumulatively. This is supported by Court of Cassation rulings, which have held that ‘gross unfairness’ transpires when the actual value of the subject of the contract and the price paid for it by the purchaser, is exorbitantly unbalanced.3 Based on this, to terminate an agreement, both ‘misrepresentation’ and ‘lésion – gross unfairness’ should exist cumulatively and conjunctively. Put simply, the two concepts should be used in conjunction and not separately. This is somewhat unique to the UAE as in many other civil law jurisdictions, such as France, Lebanon and Egypt, the two concepts can be applied separately and both can result in termination or nullification of the agreement or contract. In this respect, UAE law has set a high threshold for a finding of misrepresentation.

EVIDENCE OF CONSENT

Any actions on the part of the victim of misrepresentation that evidence their continued performance of the contract and their consent, set aside the right of the victim from claiming termination of the contract based on misrepresentation.

Article 192 of the UAE Civil Code provides that:

‘The right to cancel for misrepresentation and gross unfairness shall lapse on the death of the person having the right to apply for the cancellation or upon a dealing made in the subject matter of the contract in whole or in part in such a way that implies consent, or if the property is destroyed while in the possession of the person who would otherwise have such right, or if he consumes it, damages it or increases it.’

The fact that the victim of misrepresentation, by their own actions, continued dealing with the other party to the contract or continued to conduct affairs with the misrepresenting party on the basis of the contract to which the fraudulent means has lead, extinguishes their right to invoke any claims on the grounds of misrepresentation.

By Karim Nassif, partner, Habib Al Mulla & Co.

E-mail: karim.nassif@habibalmulla.com.

Notes

1. Please see ‘Litigating in the UAE: Initial Guidance’, IHL176, pp1-5 (by Karim Nassif and Gordon Blanke).
2. In other civil law countries, such as France or Lebanon, misrepresentation serves as a ground for nullification of the contract or agreement.
3. See Dubai Court of Cassation petition no 201 for the year 2004, judgment 15/01/2005; and Dubai Court of Cassation petition no 156 for the year 2004, judgment 03/04/2004.

It is three years since the Corporate Manslaughter and Corporate Homicide Act 2007 (the 2007 Act) came into force on 6 April 2008. After a flurry of interest in the 2007 Act and its ramifications by industry and the public sector alike, and the fear that large fines would be imposed, the reality is that the 2007 Act has not been invoked as often as anticipated. Of course, that is not necessarily a bad thing. Continue reading “Fines for health and safety breaches: what about the Scots?”

HKRUK II (CHC) Ltd v Marcus Alexander Heaney [2010] has been described by one leading rights of light surveyor as the ‘9/11’ of the rights of light world. Heaney has indeed dramatically changed the way in which owner-occupiers, developers, surveyors, insurance companies – and perhaps, more importantly, funders and prospective tenants of a proposed development – view the risks associated with potential rights of light infringements. Continue reading “Rights of light: what you need to know post-Heaney”

The European Court of Justice (ECJ) has found that the pricing of insurance and other financial services on the basis of the sex of the customer amounts to sexual discrimination. Continue reading “Safe sex?”

In traditional computing infrastructure, a computer’s operating system (eg Microsoft Windows), applications (eg Microsoft Office) and data are stored on an individual user’s computer. In the office environment data is usually stored on servers (often within the same building), which are then accessible by the rest of an organisation.

Cloud computing is a different approach to IT infrastructure. Information, software or other IT services are stored and accessed remotely via a supplier’s servers connected to the internet, rather than on individual computers or on private servers. This is not a new concept. Anyone who has a web-based e-mail account, such as Hotmail, has been able to use a simple form of cloud computing since 1997.

While cloud services have been available for some time, the growth and spend in this area has sharply accelerated in recent years. In 2009 Gartner estimated that the global market for cloud services had a value of around $46bn, with a predicted rise to around $150bn by 2013.¹ However, a lack of clarity and consistent opinion as to the perceived risks of cloud services has been problematic for both providers and consumers. This has led to difficulties in contractually allocating legal and commercial risk, in an environment where a key driver towards the cloud for many organisations is the need to control costs.

This article will outline the most common types of cloud services and provides an overview of some of the prominent legal and contractual issues when using such services.

COMMON TYPES OF CLOUD COMPUTING

The most common types of internet-based IT services that are widely referred to as cloud computing are:

Software as a service (SaaS)

In SaaS, software applications are run on the provider’s system and accessed by a customer via the internet, usually through a web browser. This means that the software is not located on the user’s computer or within a business’s servers, but within the SaaS provider’s facilities.

SaaS is designed on a one-to-many model, meaning the software and its associated host hardware can be used to serve many customers simultaneously.

The advantages of SaaS are:

• minimal configuration costs, as SaaS is designed to be run and accessed remotely;
• reduction in ongoing maintenance and support costs, as economies of scale are achieved through the one-to-many model; and
• the costs of keeping up-to-date are reduced. The supplier can roll out new versions and upgrades on a regular basis to all customers simultaneously.

Infrastructure as a service (IaaS)

IaaS provides a customer with remote access to certain pre-configured hardware that the customer is able to control and use as if it had access to the same physical hardware on-site. A common IaaS offering is a ‘virtual server’, which allows a customer to use the functionality of a traditional server remotely.

The term ‘virtual server’ is used because the customer is not accessing an individual instance of hardware. Rather it is using a set proportion of the shared resources of a powerful data centre. In this form of IaaS, the supplier is only responsible for the maintenance and running of the virtual server and its underlying hardware. The customer is responsible for running and maintaining the operating system and all software and applications running on the virtual server.²

The main advantages of IaaS are the reduction in infrastructure investment, maintenance, refresh and running costs for every element of IT infrastructure that is accessed remotely.

Platform as a service (PaaS)

PaaS is IaaS with the addition of an operating system being provided by the supplier. This allows a customer to run software on a supplier’s servers within the pre-configured virtual operating system. Under PaaS, the customer has limited control of the underlying operating system and hardware resources, and is only responsible for selecting and managing the software that is run on the virtual operating system.³ PaaS combines the advantages of SaaS and IaaS.

Everything as a service (EaaS or XaaS)

This is a hybrid term referring to a combination of SaaS, IaaS and PaaS.

ARE IT OUTSOURCINGS AND CLOUD SERVICES THE SAME THING?

Cloud services contracts share several similarities with traditional IT outsourcings, as both:

• focus on the performance of the services being provided by the supplier;
• aim to achieve efficiencies and reduce costs;
• avoid or reduce how much the customer’s capital is ‘locked up’ in IT infrastructure;
• involve the remote provision of services; and
• are typically embodied in a contractual structure that contains a significant level of detail.

Due to these similarities, there is a corresponding overlap of the contractual and legal considerations. However, there are fundamental differences between the two, which means a standard IT outsourcing contract will not necessarily work for cloud service deals (see table below).

In light of these differences, approaching a cloud service deal as a traditional IT outsourcing deal will not be appropriate for all aspects of the contract.

LEGAL AND CONTRACTUAL ISSUES

Cloud computing arrangements raise a variety of legal and contractual issues. Many of these are not specific to cloud computing arrangements but apply more generally to many types of technology services agreements.

Legal issues

Data Protection Act (DPA) 1998

DPA 1998 governs the use of data that identifies individuals (known as ‘personal data’). Those who control the processing (ie storing, recording or transmitting) of personal data must comply with the eight data protection principles (the principles) contained in Schedule 1 of DPA 1998, as well as several other provisions.

It is likely that the utilisation of cloud services will involve the transfer and/or storage of personal data between the customer and the provider. Users of cloud services will need to ensure that their cloud arrangements comply with DPA 1998.⁴

The key relevant principles are:

First principle: personal data must be processed fairly and lawfully.

While many caveats exist, consent of the individual must usually be obtained to process personal data. Consent can generally only be given when an individual has been provided with sufficient information to make an informed decision.

Cloud computing issue: providers store and process data for many customers, simultaneously utilising an array of different hardware spread over several physical locations within the cloud provider’s data centre. It is arguable whether informed consent can actually be given by the individual due to the lack of certainty or understanding as to how and where the data is to be processed and stored.

Seventh principle: appropriate technical and organisational measures must be taken to prevent unauthorised or unlawful processing or accidental loss or destruction of personal data.

The principle enshrines the concept that the standard of protections for personal data will be implemented according to the type of information, the cost of implementing solutions and the potential damage that would be caused by its loss.

Cloud computing issue: personal data ‘in the cloud’ may be spread over many physical locations within a data centre. Compliance with this may be harder to practically achieve and enforce. Customers will need to consider what access, if any, the cloud provider will have to the data stored on their systems, whether the data should be encrypted, and what back up and data recovery procedures are in place. Customers may also find that they are unable to access a cloud supplier’s facility to audit security measures due to the supplier’s pre-existing contractual commitments to other customers.

Eighth principle: personal data must not be transferred to a country outside of the European Economic Area (EEA) unless that country ensures an adequate level of data protection.

If personal data is to be transferred outside of the EEA, that in itself is a potential breach of DPA 1998 without certain conditions being met. The European Commission has established a formal procedure for certifying countries that have adequate data protection rules in place. However, this list is limited.⁵

Cloud computing issue: cloud computing providers may be offering cloud services from a location outside of the EEA. Organisations based in the EEA need to ensure that any cloud services used will be provided from within the EEA or a certified country. If the provider is outside the EEA and not a certified country, the customer will need to determine whether compliance through another permitted means is possible, such as utilising the model contractual clauses issued by the Commission or determining whether the EU-US Safe Harbour regime applies.

Markets in Financial Instruments Directive (MiFID) and Senior Management Arrangements, Systems and Controls (SYSC) rules

In the UK, the Financial Services Authority (FSA)-regulated entities are likely to be bound by the provisions of MiFID (2004/39/EC). As part of the implementation of MiFID obligations in the UK, the FSA has issued the SYSC rules.⁶ SYSC rule 8 applies to regulated businesses that outsource an operational function that is ‘business critical’. In complying with this rule, regulated businesses must (among several other provisions) ensure that confidential information relating to customers is protected, and that the business, its auditors and the FSA can access the data and the premises related to outsourced activities.⁷

Cloud computing issue: these SYSC rules are not easily reconcilable with cloud computing arrangements. As mentioned above, access to the supplier’s data centre may not be viable and it may be impossible to tell exactly where all data is physically located at any one time. This inherent feature of cloud services means securing or demonstrating compliance with the above rules may be problematic and securing customised solutions that comply with the above may erode the cost savings that the utilisation of cloud services sought to achieve.

Contractual issues

The following issues offer an insight as to why traditional IT outsourcing provisions may not be suitable for cloud deals.

Service performance

IT outsourcing approach

In outsourcing deals customers often seek supplier performance warranties against specifications or requirements:

‘Supplier warrants… it shall: (i) perform the services using good industry practice and all due skill, care and diligence; and (ii) shall meet the customer’s requirements detailed at Schedule [X].’

Cloud computing issue: the nature of the one-to-many model means that cloud services are not usually adapted to the customer’s requirements outside limited parameters. This less flexible approach is reflected in the warranties that a cloud supplier is prepared to offer.

Typically, cloud suppliers will only offer limited warranties of performance, confined to providing the cloud services in accordance with ‘good industry practice’ or ‘skill’ and ‘care’. However, in such an immature marketplace, it is not known what such standards mean.

Service levels

IT outsourcing approach

Outsourcing service levels attempt to give customers confidence that the service they have outsourced will be performed to an acceptable level. Often this will include a metric targeting the level that the customer expects the service to be available.

Cloud computing issue: where service provision is entirely over the internet, any ‘end-to-end’ service level will need to cover availability of the internet. The past three years have seen numerous high-profile examples of internet availability being affected by factors no supplier of cloud service would take responsibility for, eg political unrest, denial or service attacks and accidental cutting of submarine telecommunication cables.⁸

To date, few cloud service providers have been offering service levels that take responsibility for internet performance, leaving customers to bear this risk. Recently, however, there are examples of large providers accepting this risk and offering 99.9% uptime service level agreements to customers.⁹

Audit

IT outsourcing approach

A requirement that a customer can audit the service provider is often required as simple good practice. In regulated sectors, such as financial services or public sector procurement, this may be a stronger requirement.¹⁰

Cloud computing issue: suppliers will find it difficult, if not impossible, to identify the exact location of individual services and data for an individual customer, and will not usually allow access to service provision locations due to the obligations owed to other customers.

Termination or exit

IT outsourcing approach

An outsourcing contract will usually contain terms obliging the supplier to return the customer’s information and materials to enable the services to be brought back ‘in-house’ or transition to a replacement supplier.

Cloud computing issue: there are no cloud industry data standards for transitioning between suppliers. Cloud customers should be wary of being de facto locked-in to continuing to use a supplier by not being able to easily transition services to a new supplier. Customers should therefore look to establish an exit plan pre-contract, which will include the details of how, when and in what form the customer’s data will be returned.

CONCLUSION

Businesses need the efficiencies and cost savings that cloud computing can bring, regardless of the operational and legal risks that can be identified. This places a strain on the agreements that allocate the risks and rewards of cloud computing between customers and suppliers. What is clear is that, while the technology might be undergoing evolutionary development, the approach to the contracts that govern them might need to be revised in a more revolutionary way to adapt to the new delivery method.

By Andrew Joint, partner, and Edwin Baker, solicitor, commercial technology team, Kemp Little LLP.

E-mail: andrew.joint@kemplittle.com; edwin.baker@kemplittle.com.

Notes

1. See http://www.gartner.com/DisplayDocument?id=914826. Amazon’s Elastic Compute Cloud (Amazon EC2) is an example of this form of IaaS.
2. Microsoft’s Windows Azure is an example of platform as a service.
3. In April 2010 the European Commission noted that cloud computing raised ‘challenges to data protection’, and that ‘risks to privacy and the protection of personal data’ due to this activity are increasing. See http://ec.europa.eu/justice/news/consulting_public/0006/com_2010_609_en.pdf.
4. For example, Israel, Switzerland, Argentina, Guernsey, the Isle of Man, Jersey and Canada.
5. See http://fsahandbook.info/FSA/html/handbook/SYSC.
6. See Senior Management Arrangements, Systems and Controls (SYSC) rule 8.1.8(10) and 8.1.8(9).
7. See www.bbc.co.uk/news/technology-12306041;www.bbc.co.uk/news/technology-11980125; http://news.bbc.co.uk/1/hi/technology/7228315.stm.
8. See www.informationweek.com/news/infrastructure/management/showArticle.jhtml?articleID=229100165&cid=RSSfeed_IWK_All.
9. See SYSC Rule 8.1.8 and http://fsahandbook.info/FSA/html/handbook/SYSC/8/1; plus Office of Government Commerce ‘Model Terms and Conditions of Contracts for Services’ athttp://dev.inhouselawyer.co.uk/www.ogc.gov.uk/Model_terms_and_conditions_for_goods_and_services.asp.