the Islamic finance and banking industry has experienced tremendous development in the past three decades. The innovation of various new products and instruments has been a symbol of creativity and interaction between banking consumers, Muslim scholars, bankers, and accounting and legal practitioners. What began as a pioneering idea has now become a well-known industry that has accelerated the growth of developing countries in South-East Asia, Pakistan and the Middle East. It has evolved from being a faith-based solution to a sophisticated financing technique that is increasingly popular.

Growth and Decline

One of the motivations of the Islamic finance and banking industry is to move away from the mould of conventional banking and develop its own market, system and philosophy. A few countries, such as Bahrain, Qatar, Malaysia, Saudi Arabia, Kuwait and the UAE, have leapt forward in developing a special legal regime and market for Islamic finance at a domestic level. Rules, policies and fatwa have been improved to keep the techniques and application of Islamic finance products as close as possible to its scholastic theories. The Islamic finance industry has grown by 20% annually over the past few years and estimates of its current assets range from $700bn to $1 trillion. Growth of the sukuk market alone was at 49% in 2005, 153% in 2006 and 79% in 2007. Judging by its steep growth and innovation, some industry observers claimed that Islamic finance has successfully separated itself from the traditional banking industry.

However, by the fourth quarter of 2008 the Islamic finance industry worldwide saw a dramatic decline when compared to its phenomenal rise. The decrease continued in the first half of 2009, at 22% less than 2008. It was then followed by two sukuk defaults in the Middle East region and more sukuk defaults worldwide, despite sukuk being trumpeted for years as having not known a single default. These statistics show that the Islamic finance industry is not immune to the global downturn that occurred in conventional banking and that it is changing into a more accessible system of financing, with its own successes and failures.

What went wrong? How can Islamic finance products suffer turmoil in a conventional banking crisis? Does the Islamic finance method not emphasise mitigating risk, real asset trading, actual ownership and sound business venture (which should avoid speculative and uncertain business ventures and risky financial techniques, such as short selling and derivatives)?

It might be argued that the exaggerated reliance of Islamic financial products on assets, especially real estate assets when such assets were in a decline worldwide, prompted defaults and a lack of interest. A perfect example is the Nakheel sukuk, which had underlying real estate assets in Dubai. When the value of these assets went sour, the company could not afford to pay back its sukuk by the redemption date.

Therefore, Islamic financial practitioners must be creative to attract investors back to Islamic finance. Creativity should, of course, not be in opposition with the spirit of Sharia, and practitioners should be allowed to interpret and be creative within this context.

An example of bold innovation is Malaysia’s secondary sukuk market, which is based on the principle of bay al-dayn (sale of debt). Across the Middle East regions a sale of debt by a creditor to a third party in consideration of monetary value is not allowed unless it is made instantly and at par, hindering the establishment and development of a secondary sukuk market in the Middle East. However, the Sharia Advisory Council of the Securities Commission Malaysia took a different position based on two points. First, as sukuk is a securitised debt it, is also a form of asset (mal) or a financial right (haq mali) that is able to be sold and bought at any agreed price between the parties. Secondly, the securitised debt is analogous to an asset-backed financial right, such as shares, copyright and patent right, and is no longer similar to money. As such, sale of sukuk is not governed by the rules of money exchange. Based on these two considering the sale of debt is permitted in Malaysia and, as a result, Malaysia has, so far, the single largest sukuk secondary market in the world, which encourages issuance of its domestic sukuk that now stands at 62% of the world’s outstanding sukuk.

With this in mind, one of the most controversial statements on the current conditions of Islamic financing was that made by prominent Sharia judge and scholar Sheikh Taqi Usmani in 2007, who highlighted that almost 85% of the equity-based sukuk in the market is not Sharia-compliant due to the use of purchase undertaking to secure a capital guarantee. Although later sources reported that he was misquoted. Whether such a restrictive statement assists the growth of Islamic finance industry or whether it hinders it must be evaluated, especially when the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI) subsequently stated that redemption undertaking is allowed. However, it should be in accordance with the Islamic nature of a transaction related to risk and reward. In particular, the purchase can be based on the net value of the assets, their market value, fair value or a price to be agreed at the time of their actual purchase.

Another area that needs improvement is the over-reliance on debt-based financing structures. Surveys in the past five years indicate that the majority of financing techniques used by Islamic banking were on debt-based contracts. Although these techniques are Sharia-compliant, the creation of more debt by consumers has an adverse effect on society at macro level, especially where it involves long-term project financing or businesses related to new technology, research and development. This is due to the burden of serving a series of fixed payments to the banks, irrespective of the situation of the consumers’ businesses and projects.

Scholars of Islamic finance have long argued that Islamic banks should move from debt to equity financing, which provides more opportunities for businesses to grow and survive and which, in turn, enhances the likelihood of a successful outcome for the banks. It will be interesting to see if Islamic banks are willing to take such a bold step to structure a product by moving away from their traditional regime as creditors. (It should not be considered that buying a company share is, in essence, buying a call option, because equity is a call option on the value of the firm. Therefore, this is a different view of derivatives, and an open and new horizon for Islamic derivatives.)

Lack of Harmonisation

The world is increasingly integrated and globalised due to the advancement of communication and transportation technologies. Financial and banking markets can no longer work in isolated jurisdictions shielded from the rest of the world. Looking at the growth of the Islamic finance industry in its frontier regions, such as the US and in European countries, it is obvious that there should be an authority, not only that sets the standards on Sharia principles and financing techniques, but that is also empowered to regulate the legal and Sharia issues pertaining to Islamic finance worldwide.

At present, Islamic finance principles are governed by the rulings of individual Sharia scholars, domestic banking and securities authorities, and local courts. International bodies, such as Islamic Finance Service Board (IFSB) and AAOIFI, have been actively organising seminars and publishing standards for market practitioners. However, not many countries accept the standards issued by AAOIFI as being mandatory. As a result, a difference of opinion on acceptable Islamic finance principles still exists between countries. It is also interesting to note that the final authority in interpreting and deciding any legal issues under Islamic finance contracts is still in the hands of local judges who may not have a full understanding of Sharia principles.

As the world is unified by the impact of the financial crisis, countries with an Islamic finance industry should work together in accepting and implementing standards and regulations from one regulator. Perhaps a mechanism, such as a legal requirement for a court to seek an expert opinion from an international Islamic finance regulator, can be incorporated into the countries’ justice system.

Another aspect that requires innovation is harmonisation by way of standard contracts and general conditions. As Islamic finance practice evolves alongside various legal systems in the world, there is a greater need for the terms and conditions of Sharia-compliant documents and products to have universally accepted general terms and conditions for particular financing techniques. For example, the general terms and conditions of a wakala contract, which are legally enforceable and recognised in Dubai as Sharia-compliant, should enjoy the same position if they are used in New York.

Indeed, the need for a high-quality standard of documentation cannot come too soon, considering a growing trend in legal defence by consumers of Islamic finance products to avoid payment obligations by arguing that the financing contracts that they have signed are not Sharia-compliant, mainly due to loopholes or the style of wording in the terms and conditions of the contracts, as well as the financing techniques used. Such arguments have been used in English courts, for example, Beximco Pharmaceuticals Ltd & ors v Shamil Bank of Bahrain EC [2004] and The Investment Dar Company KSCC v Blom Developments Bank SAL [2009]. In Beximco the defendants argued that the Murabaha agreement and the exchange in satisfaction and users agreements (ESUAs) were unlawful, invalid and unenforceable under the principles of Sharia because they were loans disguised with interest. Similarly, in Investment Dar the defendant’s contention was that the wakala agreement was not in compliance with Sharia because Investment Dar was taking the deposit with the interest. The defendants’ lawyers in both Beximco and Investment Dar constructed their arguments around the interpretation of certain clauses in the contracts.

Although the judges in Beximcochose not to discuss the Sharia principles in dispute, the fact remains that the defendants’ lawyers challenged certain clauses used in the Murabaha agreement and the ESUAs. However, in Investment Dar the defendant’s lawyers succeeded in convincing the judges to overturn a summary judgment on a lesser point that the wakala agreement was not in compliance with Sharia. The final outcome of Investment Dar is yet to be seen. The conclusion may mark another bad turn that could have been avoided by having a set of high-quality standards for general terms and conditions.

Could Sharia risks in Beximco and Investment Dar have been mitigated by having standard clauses and closing procedures that are recognised worldwide, similar to the International Commercial Terms (Incoterms) as published by the International Chamber of Commerce?

It may be considered, however, that to allow these Islamic financial institutions and their lawyers to submit such arguments in a court of law for whatever reasons they might have is scandalous and might cause irreparable harm to the Islamic finance industry.

More Lessons

The recent sukuk defaults in Kuwait, the US, Malaysia and the Middle East serve as a reminder for Islamic finance practitioners and investors that existing products, techniques and systems require improvement and further innovation. It is evident that Islamic finance is not immune from financial crisis and business risks. One of the issues that needs to be addressed, pursuant to the defaults, is how various legal systems interpret and handle the recovery mechanism for sukuk investors on the assets and businesses underlying the sukuk. The Chapter 11 (of the US Bankruptcy Code) reorganisation of East Cameron Partners will be a valuable case study on the treatment of musharaka-type sukuk ($165.67m sukuk issued in 2006 by East Cameron Partners) under US insolvency law. It is also interesting to see, especially in the Gulf Cooperation Council (GCC), how English law deals with legal issues claimed under sukuk default litigation, since majority of GCC sukuk is governed by English law. What will be the conflict between the rulings of the English courts and its enforcement in one of the GCC jurisdictions where the assets and businesses are located? These countries might have jurisdictional restrictions, as for example in the UAE, where its courts are empowered to reject a foreign judgment if it considers that the UAE court has the competency to decide on the subject matter of the foreign judgment, especially in the event of real estate assets.

Now is a good time to reflect on the various aspects of Islamic finance that could go wrong and to co-operate for better solutions in the future.

Amid the coverage of the UK general election and its aftermath, the activities of the Scottish Parliament and Scottish government have dropped beneath the radar. Of course, this will only be a temporary absence, particularly since the Scottish media and political parties will soon have to switch their focus to next year’s Scottish Parliamentary elections. Before then, however, the Scottish government will aim to implement several policies that could have a significant impact on businesses. The need for companies to pay close attention to the terms and progress of these policies, each of which is at a different stage of implementation, is increased by the fact that they may be vulnerable to legal challenges.

Scottish Government proposals

Tobacco: restrictions on display and vending machines

The Tobacco and Primary Medical Services (Scotland) Act 2010 was passed by the Scottish Parliament earlier this year. Among other things (such as criminalising the purchase of tobacco by or on behalf of under-18s), it outlaws the display of tobacco products in shops and the sale of tobacco in vending machines. The Scottish government is currently consulting on draft regulations that will determine how the display ban will work, including allowing some limited display while stocktaking, cleaning or retrieving a product requested by a customer.

Alcohol: minimum pricing

The Alcohol Etc. (Scotland) Bill (the Alcohol Bill), which was introduced in the Scottish Parliament in November 2009, is designed to implement the Scottish government’s flagship policy of imposing a minimum price on alcohol products according to their alcoholic strength. Unfortunately for the minority Scottish National Party (SNP) government, Labour announced on the day the Alcohol Bill was introduced that it would not support minimum pricing. With the Conservatives and Liberal Democrats also opposing the concept, it seems unlikely that minimum pricing will be enacted. However, the Alcohol Bill continues to make its way through the first stage of the Scottish Parliament’s legislative process, which entails the Health and Sport Committee taking evidence on the legislation, before deciding whether to recommend its general principles to the whole Parliament.

Although minimum pricing may not become law, the Alcohol Bill also proposes numerous other changes that could still be enacted. These include outlawing multi-buy discounts (such as three-for-two offers) in off-licences and allowing local licensing boards to vary licensing conditions in their area. The government has said that the latter will be used to allow boards to raise the age limit for off-licence sales to 21.

High-calorie food and drinks: the Scottish government’s obesity strategy

In February 2010 the Scottish government published ‘Preventing Overweight and Obesity in Scotland: A Route Map Towards Healthy Weight’. The route map’s aims include:

• reducing the ratio of high-calorie food and drinks to lower energy options stocked by supermarkets and convenience stores;
• standardising portion sizes in ready meals and restaurants;
• implementing Food Standards Agency (FSA) recommendations on food labelling in a consistent manner ‘to avoid consumer confusion’; and
• targeting promotional activity, including product placement, price promotions and multi-buy offers ‘towards incentivising for a healthy weight’.

Although the strategy indicates that the Scottish government will seek to work with retailers and producers to achieve these goals, some of the proposals are backed by a clear threat of legislative action if voluntary approaches ‘do not achieve sufficient progress’.

problems

Each of these policies raises interesting questions of law about the extent to which the Scottish Parliament and government are entitled to get involved in these areas. Before discussing the particular issues relating to food, drink and tobacco, this article will provide a brief summary of the limits of the powers of the Scottish Parliament and government.

Scotland Act 1998

As all law students learn early on, the theory underpinning the unwritten British constitution is that the UK Parliament in Westminster can make any laws it wants. As a result, Acts of the UK Parliament can only be challenged in court in exceptional circumstances.

By contrast, Acts of the Scottish Parliament (ASPs) can be struck down by the courts. This is because the Scotland Act 1998 (the Scotland Act), which created the Scottish Parliament, contains rules on what it is able to do. The Scottish Parliament may not make laws that breach EU law or the European Convention on Human Rights (ECHR), or that relate to those areas of law that the Scotland Act says can only be dealt with by Westminster. These areas include a range of reserved topics, such as foreign affairs, social security and company law. An ASP that breaks any of these rules can therefore be challenged and invalidated.

The Scottish Parliament’s Presiding Officer considers the competence of all Scottish Parliamentary Bills prior to their introduction (Executive Bills are also considered by the Scottish government), and the Lord Advocate, Advocate General and Attorney General can challenge the competence of Bills in court before they receive Royal Assent. However, there is no guarantee that legislation is competent just because it has been passed. It is therefore open to individuals or companies affected by an ASP to challenge it in court themselves.

The limits on the Scottish Parliament also apply to the Scottish government, which has no power to do anything that the Scottish Parliament could not authorise it to do. This includes, for example, developing and implementing policies in reserved areas. Any Scottish government action that contravenes this limitation can also be challenged and struck down by the courts.

Are the Scottish Government’s proposals lawful?

Do the tobacco, alcohol and food policies relate to a reserved area?

One of the areas that the Scotland Act reserves to the UK Parliament is the ‘regulation of the sale and supply of goods and services to consumers’. The Scottish Parliament therefore has no power to make any laws relating to this issue and the Scottish government cannot introduce policies in this area. It is at least arguable that many of the Scottish government’s current proposals could qualify as relating to the regulation of the sale of goods to consumers, including:

• outlawing the display of tobacco products;
• prohibiting the sale of tobacco products in vending machines;
• imposing a minimum price on alcohol products;
• imposing other proposed restrictions on the sale of alcohol, such as the change to the minimum age limit and the outlawing of certain sales promotions;
• regulating the stocking policies and promotional activity of supermarkets and convenience stores; and
• standardising portion sizes in ready meals and restaurants.

Any of these tobacco and alcohol policies could be defined as regulating the sale of goods to consumers. Why, then, would the Scottish government and Presiding Officer both certify the policies relating to tobacco and alcohol policies as competent? The likely reason for this, and the potential difficulty for anyone challenging the policies as outwith competence, is that the question of whether an ASP ‘relates to’ a reserved area is not as straightforward as it might first appear.

Section 29(3) of the Scotland Act says that this question is to be determined:

‘… by reference to the purpose of the provision, having regard (among other things) to its effect in all the circumstances.’

In the Westminster debates on the Scotland Act, it was suggested in the House of Lords that the ‘pith and substance’ of the legislation is key, and so an Act would not be incompetent just because its provisions had an incidental effect on reserved matters. This ‘pith and substance’ test was borrowed from case law relating to the devolution of powers from Westminster to Commonwealth states, such as Canada and Australia.

The Scottish government would no doubt seek to defend a challenge to any of its proposals by arguing that they were motivated by health and public order concerns (the latter particularly in relation to restrictions on alcohol sales). However, while the motivation behind a measure might be relevant in establishing its purpose, the practical effect of the Scottish government’s proposals would nevertheless be to regulate the sale of goods to consumers. It would be difficult to claim that this effect was only ‘incidental’. The courts may therefore have grounds to decide that these proposals relate to a reserved matter and strike them down.

The Supreme Court recently considered the competence of Scottish legislation, including whether it strayed into reserved matters, in the conjoined cases of Martin & Miller v Her Majesty’s Advocate [2010]. Unfortunately, the decision is not entirely helpful in assessing the competence of the Scottish government’s food, drink and tobacco proposals. This is because the decision involved much more esoteric questions relating to criminal law and, in any event, resulted in the court divided three to two on the competence of the legislation, with the Scottish judges Lord Hope and Lord Rodger reaching sharply opposing conclusions.

However, there may be some light shed on the scope of the sale of goods reservation soon, as Imperial Tobacco has raised a judicial review challenging the tobacco display and vending machine bans. A ruling that this legislation was not competent would also have serious repercussions for the Scottish government’s food and drink policies.

Are the policies contrary to EU law or the ECHR?

Aspects of the Scottish government’s proposals may also be challengeable on the grounds that they would breach EU law if enacted. The argument would be that the restrictions imposed by the Scottish government constituted barriers to the free movement of goods, as prohibited by Article 34 of the (post-Lisbon) EU Treaty (the Treaty).

Arguably, the prohibition on displaying tobacco products could make it more difficult for foreign producers of cigarettes to launch a product in the Scottish market, as it may be difficult for them to compete with established brands if consumers cannot see new products.

Minimum pricing could also affect the free movement of goods within the EU by preventing cheaper foreign products (eg Bulgarian wine) from competing on price, and thus forcing them out of the market. Previous decisions of the European Court of Justice have struck down minimum pricing schemes (including in relation to tobacco) on the basis that they effectively negate the competitive advantages of imported products with lower cost bases.

If made compulsory, the proposals in the obesity strategy on standardised portion sizes and labelling requirements prioritising health messages could also constitute barriers to the free movement of goods. This is because foreign producers of food (and ready meals in particular) could only sell their goods in Scotland if they complied with the relevant size and labelling requirements. The FSA’s recent proposals on introducing ‘traffic-light’ labels in the UK have required extensive discussions with the European Commission on which EU labelling regulations apply and whether there must be notification to the Commission before labels can be introduced. This illustrates just how complex EU law in this area can be.

Measures restricting the free movement of goods can be permitted under the Treaty if they protect human life or health, but only if they are both necessary and proportionate. In other words, the burden would be on the Scottish government to show that the proposals would achieve their aim of improving health and that no alternative that would have less impact on the free movement of goods was available.

Interestingly, it would fall to the UK government to defend the Scottish government’s policies to the Commission if they were investigated at EU level, because the UK, and not Scotland, is the EU member state. The UK government might therefore have to argue that the policies were necessary to protect health, even if it had not introduced equivalent policies in the rest of the UK.

It is also conceivable that the Scottish government’s policies could affect the rights of retailers and producers under the ECHR, as commercial organisations are entitled to the protection of some of those rights. In particular, limiting the display, advertising or marketing of products, restricting how products can be priced and requiring shops to adopt particular stocking policies could all affect the property rights protected by Article 1 of Protocol 1 to the ECHR. The restrictions on product display and other marketing measures may also affect Article 10 rights to freedom of expression. If faced with such challenges, the Scottish government would again have to defend its policies on the grounds of necessity and proportionality.

Voluntary compliance with the Scottish government’s proposals

Any business asked by the Scottish government to follow aspects of its policies on a ‘voluntary’ basis should be aware that this may give rise to issues under competition law.

Although the Scotland Act reserves the regulation of anti-competitive practices and agreements to the UK Parliament, there is, technically, no barrier to the Scottish Parliament or Scottish government introducing laws or policies that are anti-competitive. Businesses will no doubt be aware of the kinds of co-operation between competitors (including through trade associations) that can breach the Competition Act 1998 (the Competition Act) and result in large fines. However, what may come as a surprise is that it is not a defence to a breach of competition law to say that the offending agreement was encouraged or facilitated by government, or that a government body was a party to it. It is only a defence to a breach of the Competition Act if a business was required to do something anti-competitive by law (ie by legislation or a court order).

This could be relevant to the Scottish government’s proposals that the food sector adopts particular policies on stock levels, portion sizes, labelling and marketing activity. Retailers and producers in this sector must therefore be wary of voluntarily agreeing to limit their scope to compete with each other in these areas. If minimum pricing of alcohol were to be enacted, it might also be a breach of competition law for producers or retailers to be involved in setting the minimum unit price.

Conclusion

By the time the 2011 Scottish Parliamentary elections take place, the SNP government will be hoping to have in place food, drink and tobacco policies that it can point to as signature achievements. However, even if they were all to be enacted by the current Parliament, they could still be derailed by a determined court challenge. Retailers, producers and other businesses should therefore give close consideration to their options if policies are introduced that would be detrimental to their interests.

The current economic situation has forced many companies to reduce costs. Such cost reductions can often only be effected by implementing important changes in the organisation (reorganisation), which most of the time leads to (collective) redundancies. To have a legally valid reorganisation in the Netherlands, there are several statutory requirements to comply with. This article sets out the general rules of Dutch law that apply in (collective) redundancies.

Works Councils Act

According to the Dutch Works Councils Act (WCA), every entrepreneur with 50 or more employees is obliged to set up a works council. Under the WCA, the works council has a right to give advice in relation to any intended decision that involves (among others) important changes in the organisation of the employer. Once the works council’s advice is acquired, the employer takes a final decision about the reorganisation. If the decision deviates from the works council’s advice, this deviation has to be motivated.

Moreover, in case of such deviation, the employer must suspend the execution of its decision for one month. During this month, the works council may file an appeal against the decision with the Enterprise Chamber of the Court of Appeal in Amsterdam or commence interlocutory proceedings.

Termination of employment

Perhaps the most notable feature of Dutch employment law is that, other than in cases of gross misconduct or termination by mutual consent, employers require the approval of a government agency or the court before terminating an employment contract.

Employers require the approval of a government agency or the court before terminating an employment contract.

It is important to carefully determine which employees can be dismissed in a collective redundancy, as selection of the employees who will be dismissed is a very important issue. To determine which employees will be made redundant, the so-called ‘balance principle’ applies. Pursuant to the balance principle, the number of people with exchangeable jobs to be dismissed in one business location is divided among the various age categories, in such a way that the percentage of representation of each age category in that group of employees remains more or less the same.

Selection of the employees who will be dismissed is a very important issue.

After the definitive dismissal list has been drawn up, an employer can proceed with the termination of employment. Under Dutch law, employment agreements may be (prematurely) terminated unilaterally by the employer by:

1. giving notice to the other party, normally after a dismissal permit has been granted; or
2. by a Cantonal Court procedure.

Termination by giving notice

An employment agreement may be terminated unilaterally by giving notice to the other party. Such notice by the employer, however, requires prior permission from the government agency, the so-called UWV WERKbedrijf (UWV). UWV has different offices, each one taking care of a specific geographical working area in the Netherlands. UWV investigates the reasons for the requested termination of the employment agreement. If there are sufficient grounds for termination, permission by UWV (permit) will be granted. The UWV procedure itself takes about two months. Once the dismissal permits have been issued, the employer should still serve notice of termination on the redundant employees.

UWV does not decide on redundancy payments, nor are such payments mandatory under Dutch law. If no (or little) redundancy payment is offered and the permit is still issued, the employee involved may begin litigation after their dismissal, to obtain damages on the basis of ‘apparent unreasonableness’ of the dismissal.

Cantonal Court procedure

Instead of following the UWV procedure, the Cantonal Court procedure can be followed. In this procedure the employer can request the Cantonal Court judge to dissolve the employment agreement due to serious reasons (eg economic reasons). The procedure before the court usually takes about two months and involves a written request, a written defence and a hearing. When dissolving the employment agreement, the court is not bound by notice periods. It should be noted that in relation to the termination of the employment agreement, the Cantonal Court usually grants the employee a severance payment, based on the so-called Cantonal Court Formula.

This Cantonal Court Formula results in the payment of a lump sum, based on the age, length of service and salary of the employee involved. As per 1 January 2009, the Cantonal Court judges have adjusted this formula. This adjustment lead to lower severance payments in dismissals and is therefore favourable for employers.

Severance payments in the Netherlands are calculated in accordance with the Dutch Cantonal Court Formula.

Collective layoff

The Act on the Notification of Collective Layoff applies in the event that an employer intends to dismiss at least 20 employees employed within a working area of UWV in a single period of three months.

The employer must notify both UWV and the trade unions, state the reasons for the proposed collective layoff, the number of employees they intend to dismiss with specific particulars of function, age, years of service, all in relation to the background of the total group of employees. Furthermore, the employer must state the projected dates of termination and the date on which the works council was consulted.

The employer must discuss with the trade unions not only the need to reorganise, but also the consequences thereof. In most cases, social plans will have to be prepared.

UWV may not consider a request for permission to give notice of termination until one month after the date of notification of the collective layoff to UWV and the trade unions, unless the statutory delay risks the chances of re-employment of the redundant employers or the other workers in the company. If an employer does not give the required advance notification to UWV and the trade unions, but eventually requests permission to give notice from UWV to dismiss 20 or more employees within the three months period, the statutory delay is increased to two months. The mandatory delay serves to facilitate consultations between the employers, the trade unions and UWV, and in major cases, the Ministry of Economic Affairs for the Ministry of Social Affairs and Employment.

Social plan

In the event of a dismissal of a considerable number of employees for economic reasons, employers normally draw up a so-called ‘social plan’. If trade unions are involved, then the content of a social plan is often agreed on. In such a social plan, the social and financial consequences for the employees are arranged.

In principle, if the employees and/or their representatives have been involved in the negotiations for a social plan, and if the implementation of the social plan does not have evidently unreasonable consequences for the employee involved, the Cantonal Court judge will be bound to the social plan. This means that terminating the employment contract can easily be effected by requesting the Cantonal Court judge to dissolve the employment contract.

Conclusion

Reorganising a business in the Netherlands means fulfilling certain statutory requirements, and fulfilling them in a correct and timely manner. Depending on the size and structure of the company, and the extent of the redundancy (20 employees or more), there can be additional rules that need to be taken into account when reorganising a business. Considering the wide scale of statutory requirements, it is advisable to provide for a strict timetable. When having a correct preparation on the steps to be taken and a measured timetable, reorganising a business can be an effective way to cut down costs.

Boekel De Nerée is a leading independent Dutch law firm of advocaten and civil law notaries.

Based in Amsterdam, it offers specialist advice to clients in a wide range of industries. Its corporate practice includes an Anglo-American advisory group specifically geared to serving the interests of clients from English-speaking parts of the world, providing clients with a peace of mind when dealing with matters in the Netherlands jurisdiction.

www.boekeldeneree.com

Depending on which newspaper you read, the Digital Economy Act 2010 (the 2010 Act), which became law on 8 April 2010 after a speedy parliamentary ‘wash-up’ procedure, is either going to kill or cure the digital ills of the nation. Certain quarters of the press would have us believe that it is only a matter of time before threatening letters drop through the doors of millions of pensioners, accusing them of illegally downloading hardcore pornography. These poor souls will have their internet cut off within seconds by demonic record or film executives, cackling maniacally as they do so. This, of course, is fantasy. At the time of writing, nobody, not even Ofcom, has a large red button with which to turn off internet connections at will.

What is striking, but less widely reported, is that the 2010 Act potentially affects the majority of businesses in the UK, not simply the traditional copyright owners, internet service providers (ISPs) and infringing individuals that might be expected.

Key Provisions

The 2010 Act deals with a range of digital issues from domain names, regional news services and video game classification to the public service remit of Channel 4. Most are uncontroversial. However, the headline provisions of the 2010 Act have become something of a political football. They relate to the thorny issue of illegal downloading of copyright material from the internet.

For many years, it has been heard how internet piracy is dogging, in particular, the music and film industries whose works are being illegally shared via, most commonly, peer-to-peer networks (P2P). A sizeable proportion of the culprits are individuals who share material by downloading or uploading and utilising P2P websites, as well as those who run the P2P websites. The 2010 Act was seen by many in the creative industries most affected to be the mechanism to help put an end to such abuse. However the following three key questions have arisen:

• Will it work?
• Will copyright owners use it?
• Is it more effective than remedies already available?

Feasible?

The 2010 Act outlines the following new procedure:

• Copyright owners may send a copyright infringement report to an ISP after apparent copyright abuse and within one month of an alleged incident. This abuse may either be infringement by a subscriber or by a person who a subscriber allows to use their service. The report must provide a description of the alleged incident, including evidence and internet protocol (IP) address details, ie the connection information that identifies who the subscriber is. The ISP must then notify the subscriber within a month, providing evidence and information about legal advice and appeals.
• Copyright owners may request a copyright infringement list that the ISPs must provide and that outlines which of the reports refer to an individual subscriber in a given period. The list is anonymised.

Copyright holders can then apply to court for a Norwich Pharmacal order, essentially an order forcing the ISP to identify the subscriber so they may then pursue them for copyright infringement.¹ This is not a new device and ISPs rarely challenge such applications.

Failure to carry out the above may result in a fine of up to £250,000, enforced by Ofcom. The Secretary of State may also direct Ofcom to assess whether technical obligations should be placed on ISPs (following consultation and parliamentary approval). These obligations are measures that:

• limit the speed or other capacity of the service;
• prevent a subscriber from using the service to gain access to particular material;
• suspend the service; or
• limit the service in another way.

These measures have been accused of being at best draconian and at worst an infringement on a subscriber’s human rights, specifically their right to privacy and right to freedom of expression. A fine of up to £250,000 may be applied to ISPs who fail to carry out technical measures.

The 2010 Act also provides for the implementation of regulations (following consultation and parliamentary approval) allowing courts to grant a blocking injunction in respect of a location on the internet where a substantial amount of material has been infringed. The vague ‘location on the internet’ has already attracted criticism.

Critically, however, the entire discussion remains moot until an Initial Obligations Code is introduced to be drafted or approved by Ofcom. The Code must deal with when copyright owners may use the above procedure, setting a threshold for when they may request a copyright infringement list. It is expected that this will be a ‘three strikes’ system. The Code must also contain various provisions concerning evidential requirements costs, information storage, enforcement and sanctions. It would be for Ofcom to arbitrate disputes between ISPs and copyright owners while a first-tier tribunal would be set up to deal with subscriber appeals.

Subscribers may appeal successfully if they can show that either they did not commit the act or that they took reasonable steps to stop others doing so via their service.

As to whether the above procedure is feasible: it is far too early to tell. The Code is not yet drafted and no consultations have taken place. The process is likely to be bitterly fought, lengthy and face political hurdles. The Liberal Democrats have stated their desire to repeal sections of the 2010 Act. The Conservatives have previously indicated a desire to alter the remit of Ofcom. It remains to be seen whether the coalition government will have the intent to see these provisions bear fruit.

Furthermore, the technical measures can only be implemented at least a year after the Code has been introduced, and must be consulted on and laid before Parliament. Ofcom must also introduce a separate Technical Obligations Code to regulate their use.

Will it be used?

Assuming the above hurdles are overcome and the procedure can be used, the next question is will it be used, or rather, should it be used?

It is true that there is likely to be a rush by copyright holders to use the procedure once the Code is in place and, if so, infringers have reason to be concerned. However, those considering using the procedure would be wise to look before they leap. Long before the 2010 Act, copyright owners pursued individual infringers through large-scale letter writing exercises. Many of these copyright owners have subsequently found themselves fighting a losing PR battle against newspapers willing to take up the fight or give people a platform to air their views.

While it may appeal to copyright holders at first blush to pursue the individuals, they must weigh up the benefits against the potential reputational damage. Reputational damage can come from a variety of sources, from the mainstream press to irate and determined bloggers. Pursuing a campaign against infringers without considering how to deal with potential criticism is ill-advised, and can do more harm than good to a company’s brand both locally and internationally. Pre-emptive press strategies to deal with such eventualities can be put in place, defamatory material can be removed from websites, and blogs can be traced and shut down, but the key is to be in a position to weigh that effort and cost against the financial rewards of pursuing infringers. Forewarned is forearmed.

Is it an improvement?

Much remains to be seen as to how feasible the procedure and sanctions are. However, assuming its teething difficulties are overcome, the 2010 Act does offer some useful remedies. People could be forgiven for thinking, in light of the furore surrounding it, that this is the first time copyright holders have been able to protect their work. It is not, this new procedure merely complements the remedies already available.

When faced with copyright infringement on a website, the traditional route has been to request that the offending material is taken down and/or apply for injunctive relief and damages further to the Copyright, Designs and Patents Act 1988. Injunctions against ISPs are also possible if they have actual knowledge of the infringement. The problems start when trying to injunct P2P sites that don’t actually contain the infringing material, but rather facilitate the sharing of it. The 2010 Act is designed to plug this gap by blocking online locations. However, as noted, this is yet to be consulted on.

In addition, what the 2010 Act does, which the traditional route does not, is put people on notice that if they continue to download they may be prosecuted. Such would not be feasible in terms of costs using the traditional route.

But the traditional route still has its advantages, not least where there is a mixed purpose to the material or where it is simply hosted online. Take, for example, the scenario where someone posts private footage of a celebrity onto a video-hosting or sharing website. Under the 2010 Act, a report request to the ISP could be made and then a list requested, but these take time. The main objective is the removal of the material immediately and the 2010 Act does not assist. The traditional route offers that immediacy through an injunction for copyright infringement and breach of privacy against the website. People can then quickly apply for a Norwich Pharmacalorder that the ISP identify the person who had uploaded the information. This could all be done out-of-hours or at the weekend. It would be assumed that ISPs are not available to produce copyright infringement lists at such times.

Information would not have to be private. Take another scenario, for example a similar website persistently ignoring written requests to remove certain uploaded content or block a particular user. The threat of an injunction and the associated costs concerns may well be sufficient to prompt them into action. Threatening a request for an infringement list is not likely to have the same effect.

Conclusion

Much will depend on the terms of the Initial Obligations Code, if, and when, it is agreed. Until it is finalised, effective remedies are available to combat certain infringements. In the interim, individuals would do well to ensure their connections are secure, wi-fi providers should consider taking advice on the matter and employers who provide internet access should consider how best they might avoid the nightmare scenario of turning up to work one day only to find their internet connection cut off.

As a final thought, it is perhaps interesting to note that recent research into the effectiveness of similar three-strike legislation in France found that, in the three months after legislation was passed, although admittedly prior to implementation, piracy actually rose by around 3%, with people moving away from P2P sites and towards other illegal sharing methods not captured by the legislation. One news report compared it to a game of Whack-a-Mole.

In the current market, tenants increasingly seek to exercise break clauses of over-rented and unwanted properties, but in so doing have encountered resistance from landlords. Three recent High Court and Court of Appeal decisions underline the difficulties a tenant faces in attempting to effect a break clause in a commercial lease. This article will examine these cases and summarise some of the lessons learnt from case law, particularly in respect of service of the break notice and compliance with conditions.

What is a break clause?

A break clause is the expression used to describe a right to terminate a lease, typically on a given date (the break date), by written notice. It commonly provides for six months’ notice to be given. If such a notice is ineffective, the lease carries on beyond the break date, often to the contractual expiry of the lease.

Break clauses frequently specify conditions that must be satisfied for the break to take effect. Common examples include the tenant being obliged to pay all rent owing (and/or all other payments owing); to perform all of its covenants; to not be in breach of its repairing and/or redecoration covenants; and to give up vacant possession by the break date. Break clauses in a landlord’s favour are less common and sometimes require the landlord to establish an intention to redevelop.

It is generally held that where there are conditions attached to the operation of a break clause, they must be strictly performed within any specified time limits.

Case law indicates that tenants not only have difficulty complying with what can be onerous conditions, but also that break notices frequently fail by virtue of tenants serving the notice on the wrong party or not in the manner prescribed by the lease.

Norwich Union Life and Pensions v Linpac Mouldings Ltd & ors [2010]

In Norwich Union, break clauses were contained in licences to assign granted to a company called Linpac Mouldings Ltd (Linpac), entitling ‘the Assignee (meaning Linpac Mouldings Limited only)’ to terminate the term by notice. Linpac assigned the leases to Ecomould Ltd, who subsequently went into administration. Consent was sought from the landlord to re-assign the leases back to Linpac. The landlord refused consent on the basis that there was a risk that Linpac would then seek to exercise the personal break right.

In the High Court, Lewison J held that the landlord’s consent had been reasonably withheld, even though its fear that the break clause would ‘revive’ on the assignment was unfounded. The question was not whether the landlord’s appreciation of the legal position was right or wrong, but whether it was a reasonable view to hold.

Lewison J then held that the rights to break perished on the assignment to Ecomould and would not revive on an assignment to Linpac. The proposition that the lease could be terminated by someone who once was, but no longer is, the tenant in possession ‘makes no commercial sense at all’.

The Court of Appeal agreed. Etherton LJ said that he had ‘no hesitation’ in rejecting Linpac’s appeal. He said that the leasehold documents should, in the usual way, be interpreted so as to:

‘Give effect to the intention of the parties to be ascertained in the light of the commercial purpose and context of those documents and the factual setting known to the parties.’

A provision allowing a former tenant to bring a lease to an end at a time when the lease is not vested in them ‘would be extraordinary, even if technically possible’. If the parties had intended this, they would need to take particular care to make it unambiguously clear.

Linpac should have sublet the leases, rather than assigned them, thus preserving its right to break.

Orchard (Developments) Holdings plc v Reuters Ltd [2009]

In Orchard, the break clause provided that the tenant was entitled to terminate the lease at the end of the fifth or tenth year of the term by giving six months’ previous written notice to the landlord. The notice provision in the lease provided that a notice was valid if:

• it was given by hand, sent by registered post or by recorded delivery and served on the landlord at its registered office; or
• the notice was served in some other way, as long as receipt was acknowledged by the receiving party or its authorised agent.

The notices delivered by hand by a process server were put in the wrong letterbox. Further notices were sent by fax to the landlord’s office, but after the six-month period. Subsequently, the landlord’s solicitors wrote a letter to the tenant’s solicitors acknowledging the fact that the faxed notices had been received at the landlord’s office.

The High Court held that the landlord had retrospectively validated the informal notices sent by fax. The Court of Appeal disagreed, allowing the landlord’s appeal. Rix LJ held that, where the timing of the notice is part and parcel of its essence, it would be ‘odd’ if a notice that only became effective too late could nonetheless be an effective notice. If it is ineffective at the critical moment six months before the lease anniversary in question, it cannot be made effective within the six-month notice period.

Orchard highlights the view commonly held and expressed by Rix LJ that:

‘The provisions regarding a break clause option are there for the tenant to operate, and he fails to operate them correctly and timeously at his peril.’

Prudential Assurance Company Ltd v Exel UK Ltd & anor [2009]

Finally, a dispute concerning a break clause that did not reach the Court of Appeal. Prudential was decided by the High Court last year and is a salutary lesson to solicitors acting on behalf of tenants seeking to exercise a break notice.

The premises in question were let to two group companies, one trading and one dormant. The notice served stated that it was being served for, and as agents of, the trading company only. No reference was made to the other tenant, the dormant company.

The High Court held that the break notice was invalid. A mistake in a notice will not necessarily invalidate it if its meaning is still clear but, in Prudential, the notice could not ‘unambiguously have been understood to be an effective notice by a reasonable recipient’.

Lessons learnt

These cases and many others that precede them highlight the various difficulties faced by tenants in exercising break clauses. Lessons can, however, be taken from them:

Serving the notice

• Consider all of the terms of the lease carefully.
• Check the identity of the current tenant and current landlord (who is paying the rent and to whom, the title and the Land Registry).
• Confirm that the notice can be served by the current tenant (and was not personal to a previous tenant).
• Check and follow the service provisions in the lease, particularly where they are mandatory.
• It is normally worth serving on the current registered office if the receiving party is a company (check the details with Companies House).
• Ensure that service is expressed to be served on behalf of, and as agents for, the correct party.
• In serving the notice, it is often advisable to adopt the wording of the break clause.
• Service must obviously be in good time in accordance with the provisions of the break clause.
• When the notice is sent ensure that it is signed for (if sent by recorded delivery) or, if applicable, hand delivered in good time.

Note the lesson learnt from Claire’s Accessories v Kensington High Street [2001] where the notice was served (by the landlord) in good time at the tenant’s property, but not, as provided by the lease, at the tenant’s registered office. The court held that the requirement was mandatory and the notice was held to be invalid.

Complying with conditions

• Check exactly what conditions must be complied with for the break to operate.
• Consider from when compliance is required – some clauses provide that compliance is required from when the notice is served up to the time that the break takes effect.
• If the lease requires all rents to be paid, consider what sums are reserved as rent, such as service charge and insurance. Ensure that all sums are paid on time.
• If the break clause requires vacant possession, make sure the landlord is able to occupy the property without any physical or legal impediment.
• The obligation to yield up the premises in good repair can be a difficult condition to comply with. If compliance is to be ‘material’ this will assist, but it is still difficult. The test laid down by the Court of Appeal in Fitzroy House Epworth St (No 1) Ltd & anor v The Financial Times Ltd [2006] is that materiality must be assessed by reference to the ability of the landlord to re-let or sell the property without delay or additional expense.
• Be careful of conditions that must be complied with no matter how trivial the breach. For example in Bairstow Eves (Security) Ltd v Ripley [1992] EGLR 47 the lease required that the property be painted in the last year. It had in fact been painted just before the beginning of the last year but the court held that the condition as to compliance had not been satisfied and the break was ineffective.
• If at all possible, as a tenant, you are well advised to try and get the landlord ‘on board’. Ask the landlord to confirm what steps you need to take to comply with the conditions. If the landlord responds (it is not required to do so) then this can, in certain circumstances, give the tenant reassurance as to the steps it needs to take.
• If the break date falls partway through a rent period and payment of rent in advance is a condition, should the tenant pay the entire quarter? Unless the break clause says otherwise, the safe option is to pay the entire quarter owing and then seek to reclaim the balance after the break has taken effect. However, the bad news for tenants is they are not necessarily entitled to be reimbursed.

Conclusion

The overall message in this market is clear: tenants must tread extremely carefully to ensure that their break notices are effective. If they fail, the consequence of having to pay rent on an unwanted property for several years can be very costly.

The internet promised a revolution in retailing. ‘One-click’ shopping was heralded as the ultimate in ease and comfort for savvy shoppers. While this remains largely true, increasingly the online retailing experience is characterised by a myriad of terms and conditions (T&Cs), privacy policies, order confirmation e-mails and delivery status notifications that need to be either accepted or responded to when concluding an online transaction. Compliance with regulatory obligations is driving most of these processes and this article sets out a summary of what those primary regulatory obligations are. It will also briefly consider whether a creative implementation of future regulatory requirements by the Irish legislature could be used as a tool to promote Ireland as an intellectual property and e-commerce hub.

Primary Legislation

In addition to domestic consumer rights legislation, EU-based internet retailers need to ensure that their websites and T&Cs comply with three main pieces of legislation:

1. the Distance Selling Regulations;
2. the E-Commerce Directive; and
3. the Unfair Commercial Practices Directive.

Distance Selling Regulations

The EC (Protection of Consumers in Respect of Contracts Made by Means of Distance Communication) Regulations 2001 (the 2001 Regulations) came into effect in Ireland on 15 May 2001. The 2001 Regulations apply to most forms of distance contracts and the main provisions applicable to internet retailers are as follows.

Prior information

To ensure that an internet retailer can enforce it’s T&Cs against a consumer, certain information must be supplied to the consumer before the contract is concluded (this is normally achieved by way of a pop-up, splash page or e-mail). This prior information includes, but is not limited to:

1. the identity and address of the supplier;
2. the price and delivery costs, including all taxes;
3. the existence of a right of cancellation;
4. the period for which the offer or the price remains valid; and
5. where appropriate, the minimum duration of the contract.

Written confirmation

In addition, unless the consumer receives confirmation in writing, or in some other accessible durable medium, of the prior information outlined above, the distance contract will not be enforceable against a consumer.

Right of cancellation

The 2001 Regulations introduced a seven-day ‘cooling off’ period for consumers. A consumer has seven working days in which to cancel the distance contract without cause and the only cost payable is the direct cost of returning the goods. This right does not apply to services or goods that are immediately performed or consumed. The T&Cs should expressly provide that the notice of cancellation must be in writing and that the consumer must actually return the goods if it is exercising its cooling off rights, as neither of these points are covered by the 2001 Regulations.

If the consumer is not informed of this cooling off right, the cooling off period is extended by up to three months.

E-Commerce Directive

Directive 2001/31/EC (the E-Commerce Directive) was transposed into Irish law by the EC (Directive 2001/31/EC) Regulations 2003 (SI No 68 of 2003).

Prior information requirements

The main impact of the E-Commerce Directive was that it imposed further prior information requirements (the most important of which are outlined below) over and above those set out in the Distance Selling Regulations.

Businesses operating online must provide the following information to users of their websites in a manner that is ‘easily, directly and permanently accessible’:

1. name, geographic address and contact details (including a contact e-mail address);
2. how the user can register its choice in relation to direct marketing;
3. where the provider is registered in a public register, is subject to an authorisation scheme or is a member of a regulated profession, relevant details should be provided to visitors to the website;
4. VAT number, if applicable;
5. details of the technical steps followed to conclude the contract online; and
6. the manner in which errors can be identified and corrected prior to placing orders.

The E-Commerce Directive also requires that the applicable T&Cs must be made available to customers in a way that can be stored and reproduced.

Unfair Commercial Practices Directive

The EU Unfair Commercial Practices Directive (Directive 2005/28/EC) of 11 May 2005 was implemented in Ireland by the Consumer Protection Act (CPA) 2007. CPA 2007 has entered fully into force, with the exception of ss48-49 dealing with surcharges on certain payment methods.

This legislation introduces a range of measures to encourage compliance with consumer law through self regulation and various enforcement mechanisms that are available to the National Consumer Agency.

CPA 2007 deals with a range of commercial practices, which will be deemed to be unfair if they satisfy the following criteria:

1. they are contrary to the requirements of professional diligence;
2. they are likely to impair consumer choice; and
3. the practices cause the average consumer to make a decision that they would not otherwise have made.

Under CPA 2007 there are three distinct types of unfair commercial practice, namely misleading, aggressive and prohibited practices.

Regulatory Enforcement

Why the need to refocus on the regulatory obligations? A recent study by the European Commission of websites selling electronic goods has found that more than half of the websites studied failed to comply with the consumer protection laws outlined in this article. The main issues arising from the study were:

• consumers were not told of the seven-day cooling off period;
• failure to provide full contact details of the service or goods provider;
• failure to provide full information on the legal right to a refund, replacement or repair of a faulty product; and
• failure to provide full details of the costs of the product, including delivery and tax costs.

Given that the issue is now making waves at Commission level, it is likely that domestic authorities will start to pay closer attention to the websites of companies located in their jurisdictions, and will seek to sanction and censure any companies whose websites or T&Cs are non compliant. Website operators should take the time to review their websites and T&Cs with their advisers to ensure that they adhere to the consumer legislation outlined above.

Opportunities for Ireland

Much of the legislation discussed has been introduced to ensure that existing consumer protection laws extend to online transactions and also to provide purchasers with effective remedies against online retailers that are located in jurisdictions far removed from the purchaser. While consumer protection will always remain a social priority, a balance needs to be struck against the increasingly complex regulatory regime faced by online retailers (particularly those based in the EU).

Traditionally, a favourable tax regime was one of the most important factors in deciding which jurisdiction to establish a technology business. However, it is likely that internet companies will now consider the relevant regulatory regime as equally important. It is a stated objective of the Irish government to develop a ‘smart economy’, and attract new internet and digital businesses to Ireland. The government should remember that any steps to create a favourable regulatory regime in Ireland for e-commerce, either by way of domestic initiatives or the sympathetic implementation of directives, could help to give Ireland a competitive advantage in attracting internet businesses and creating the smart economy that is strived for.