Summer 2018 Kernel The Scotland Food and Drink Bulletin CMS_LawTax_Negative_28-100.eps 4 6 8 10 13 14 Health, food safety and hygiene: the cost of non-compliance The implications of doing business in China Ways to protect your reputation online Third party rights: what you need to consider Cinema alcohol licences: too dark to drink safely? Rock...paper and signature: Rock Advertising Limited’s oral variation claim fails 2 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 Kernel Welcome to the latest issue of Kernel, our Scotland food and drink bulletin. In Kernel, we examine current legal issues affecting the Scottish food and drink industry and provide bite-size articles on key developments. In this issue, we consider the following: — Health, food safety and hygiene: the cost of non-compliance; — The implications of doing business in China; — Ways to protect your reputation online; — Third party rights: what you need to consider; — Cinema alcohol licences: too dark to drink safely?; and — Rock…paper and signature: Rock Advertising Limited’s oral variation claim fails. If you would like to discuss any of the articles in this edition of Kernel or wish to provide any feedback, please contact Alison McCartney at 3 Earlier this year, labelling errors resulted in Russell Hume, an established food business and meat supplier, being put into administration. This followed a spot check inspection by the FSA which led to the suspension of business due to suspected breaches. This seemingly low-level regulatory offence of mislabelling has also thrown the business into a criminal investigation with key personnel being interviewed under caution. Meanwhile we have also seen some very high profile pest infestation cases being pursued in the UK’s food and drink sector. At the end of 2017, a parliamentary inquiry was launched by the Environment, Foods and Rural Affairs Committee leading to Ranjit Singh Boparan, former Chief Executive of 2 Sisters Food Group being called to give evidence and explain the group’s failure to prevent the offending. The rapid drop in share price only emphasised the level of damage that can be done by the mere suggestion of breaches of food law. This is despite the fact that no criminal action has been brought against the organisation. The dramatic changes to sentencing brought into effect in 2016, are at the heart of this latest crack-down by the authorities that govern the sector. These are all outlined in the “Health and Safety Offences, Corporate Manslaughter and Food Safety and Hygiene Offences: Definitive Guideline”. These guidelines which were intended for application in England & Wales, have also been interpreted by the Scottish Court of Criminal Appeal as being “the appropriate guideline, to have regard to, as a cross check”. For the first time sentencing for breaches of food safety and hygiene has moved from being a little known or respected regulatory regime, which if breached could easily be assigned as a commercial risk, to a level of real financial and reputational risk that should give food law compliance a seat at every food business board meeting. As set out in the guidelines, penalties for food safety and hygiene offences can range from £100 to £3 million, while penalties for health and safety breaches go even further, ranging from £50 to £10 million, with the potential for fines in excess even of this range. With offences based on exposure to risk rather than actual harm, there is no scope for complacency. In addition, courts have a host of other options to consider, such as Prohibition Orders, which can immediately close a business if the court is satisfied that there is an immediate risk to public health. In a situation where a food business is convicted, the court may also have discretion to close or put conditions on the business in light of the previous offending and failure to heed warnings or advice. Meanwhile there are other regulatory measures also impacting on the industry, including the recent introduction of a sugary drinks tax, and proposals for streamlined “novel foods” legislation. Such measures have only added further to the spotlight firmly shining on the sector, and that is not to mention the issue of Brexit and the associated opportunities or threats of food law divergence for the sector to get to grips with in the months ahead. The increasingly draconian approach to food crime has undoubtedly matched the dramatic increase in public awareness of the importance of safety and integrity in the products they consume. The increased demands for healthy and specialist foods has changed the structure for many businesses operating within the industry. The result is vast global supply chains which make it much harder to control the individual elements, introducing new risks, whilst at the same time the demand for local sourcing from artisan suppliers has resulted in extensive consumer and regulatory scrutiny. The pressure food businesses are under has never been greater. Health, food safety and hygiene: the cost of noncompliance Sentencing guidelines introduced two years ago are really making their mark on the nation’s food and drink sector. 4 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 Fiona Carter Consultant T +44 20 7367 2672 E Jacqueline Rédarès Senior Associate T +44 1224 267150 E 5 Lifecycle compliance challenges Under the current regulatory regime, compliance challenges for food manufacturers and distributors are present throughout the whole lifecycle of the products. Firstly and most importantly, certain foods must be registered or recorded before it can be marketed, distributed or imported into China. During the registration of a product, manufacturers must submit sufficient documents evidencing the safety and quality of the product to the competent authority. Distributors must also ensure that distributed products have been duly registered. After registration, the products must be manufactured and marketed in accordance with applicable laws, regulations and national or industry standards. It is easy to be careless during this phase as the applicable rules may be scattered across different regulations, notices, local guidelines, etc. For example, with health food, it is particularly important to pay attention to labelling and advertising, as the administrative authorities are currently focusing on these. Failure to meet the requirements may lead to different levels of liability for manufacturers and suppliers. Even after the products have been sold to consumers, manufacturers and distributors will still have obligations to recall any unqualified products, and reporting any potential health risks to the competent authorities. Compliance risk for cross-border e-commerce It is possible that the regulatory regime in new business areas, such as CBEC is vague, or even missing in parts. This does not mean that the regulations can be ignored. On the one hand, CBEC brings great economic development to China, and on the other hand, these channels may be used to bypass regulatory requirements on food, such as the registration requirement for imported health food and infant milk powder. The Chinese authorities strive to find a balance between developing the economy and strengthening administration. For now, businesses can still enjoy low tariffs and exemption from registration requirements, but these are expected to be temporary. However, the lack of registration requirements does not mean that the general food safety regulations may also be bypassed. If there are any safety issues caused by the food imported via CBEC, relevant liabilities, as set out in the current regulatory regime, may be incurred. Doing business in China China is a large and promising market for food manufacturers and distributors due to its large population and its increasing demand for high quality food. Crossborder e-commerce (CBEC) is developing quickly in China, and it provides multinationals with a more flexible way of entering China’s big food market. Potential investors should note though that China is also implementing a strict regulatory regime on food safety, with serious punishments for breaching the rules of the regime. 6 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 Intellectual property risks Most intellectual property rights are under a “first to file” regime in China, including patents, trade marks, and domain names, and these are key for the business practices of food companies. The internet has made it easy for anybody in China, including “professional squatters”, to learn of the trade mark of an overseas company and then register it. Sometimes the Chinese distributor may also squat on the trade mark of an overseas company it is cooperating with. Some companies may have the foresight to register IP rights expediently, but it will not provide them with absolute protection, especially for their trade marks. Registration of a trade mark in its original language does not mean that it is protected in its Chinese translation. Failure to register the corresponding Chinese mark might lead to the company having to use great effort and money to buy back the squatted trade mark further down the line. Moreover, even though Chinese consumers show preference towards international brands, a trade mark in Chinese may be more recognisable to them. However, care should be taken to ensure the Chinese version reflects the spirit of the brand e.g. a literal translation may sound awkward whereas a transliteration might be more effective. Overall, the waves of new measures and regulations show that the Chinese authorities are determined to improve food safety and it has created a labyrinth of rules. In businesses concerned with complex regulatory regimes, engaging a local expert is sensible. Nick Beckett Managing Partner, Beijing Office T +86 10 8527 0287 E 7 But what can be done when trouble comes knocking? In this digital age, with easy access to the internet and social media, it is easier than ever for reputations to be adversely affected by malicious online commentary, the unlawful exploitation of your intellectual property or the misuse of confidential information. What are the most common reputation management issues we see in the sector – and what can be done about them? A sign of the times: common issues experienced in the sector A number of trends can be identified in the sector as a whole. Each requires careful internal management and strategic planning to mitigate any adverse impact on brand reputation. 1. Web-based defamation and anonymous digital comment Legally, defamation occurs when someone makes a false and damaging statement or allegation against the character or reputation of someone else. What makes the statement defamatory is whether it would damage your reputation in the eyes of the ordinary person. The law protects against statements which are defamatory, rather than those which are true, but merely critical. Traditionally, defamatory statements were often found in print media, such as newspapers and magazines. Nowadays, it is more common for defamatory statements to be made online, particularly on social media platforms or online review websites. Increasingly, we see a trend in such comment being made on an anonymous basis, When trouble comes knocking: protecting your reputation online By 2030, the farming, fishing, food and drink sector aims to be Scotland’s most valuable industry: a £30 billion business and a world leader in responsible growth. At the heart of achieving that ambition is protecting the reputation for excellence in Scotland’s food and drink sector and the individual businesses operating within it. often on blogs or social media, or via email campaigns sent to customers, suppliers and industry bodies. Often, such comment is made via anonymous accounts, which have no identifiable contact details and no traceable IP address to identify a named person as the wrongdoer. 2. Data leaks, cyber-breaches and blackmail In the post-GDPR (General Data Protection Regulation) world, data breaches, hacking and cyber-attacks are real concerns for all businesses. Preventing these attacks is one thing, mitigating their effects is another. With cyber-criminals constantly innovating, it is vital to keep your defences up to date. These episodes can cause acute reputational impact, together with regulatory implications, given the new requirement under the GDPR to notify serious breaches of personal data to the Information Commissioner and affected data subjects. Increasingly, criminals are using the opportunity of data-breaches to exploit victim organisations, through anonymous blackmail and online threats, often requiring payment in return for the promise of non-publication of sensitive material. 3. Misuse of confidential and private information Protecting recipes, customer lists and pricing models is often critical to your success as a business in the sector. When information which is confidential and private is misused or leaked, it can not only undermine the USP of your enterprise, but can also irreparably damage consumer confidence in your brand and reputation. Increasingly, we see the misuse of confidential and private information by aggrieved employees or those moving on to work for competitors in the sector. 8 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 4. Infringement of intellectual property rights In today’s knowledge economy, often the most substantial value of a business is based on its intangible assets and goodwill, so protecting intellectual property plays a key role in obtaining, and maintaining, your competitive advantage. The right brands will win the hearts and minds of consumers and customers. The right patents will prevent others exploiting your inventions, or provide a substantial barrier to market access. Copyright, confidentiality and rights in designs also have a vital role to play. Infringement of intellectual property rights is a live issue for the sector. Recent trends in Scotland include the making of “copy-cat” website and domain names, which confuse customers and re-direct to other competitors’ offerings. We also see “guerrilla” marketing and advertising, which while innovative, sometimes cross a line and stray into the infringement of others’ intellectual property rights. Fighting back: what can be done? Reputation is one of the most valuable assets the food and drink sector in Scotland has. When this is under threat, it is important to defend it quickly and fervently. So, what can be done? When you are faced with an assault on your reputation, moving quickly to shut down the harmful event and prevent any further adverse impact is crucial. Having lawyers who understand how print, broadcast and online media work, and which tactics will work with whom, can assist in reaching a solution quickly, with minimal impact to reputations. Often, it is possible to stop the wrong and prevent any further harm through an effective and forceful legal response, which precedes the raising of formal court proceedings. Where necessary however, protection from the courts can be sought, often on an urgent and interim basis. In suitable cases, the courts have been prepared to grant protection through a variety of remedies. These include (a) interdict or injunctive relief (an order ‘stopping’” wrongful conduct), (b) ‘unmasking orders’ in respect of anonymous bloggers or hackers, and (c) the delivery of mis-appropriated confidential information, among others. A suite of remedies is potentially available when trouble comes knocking in the food and drink sector in Scotland. The key is having a crisis management plan in place and knowing who to turn to when you need help. If you would like to discuss managing your reputation online, whether on a preventative, precautionary or urgent basis, please contact one of our Food & Drink Scotland team specialists: Colin Hutton Partner T +44 131 200 7517 E Rory Thomson Senior Associate T +44 131 200 7671 E Graeme MacLeod Partner T +44 131 200 7686 E Emma Boffey Associate T +44 131 200 7551 E CMS’ reputation management practice ‘is first rate and has a rare quality in being able to provide exceptional advice to both claimants and defendants’. The group is ‘at the top of the list for corporate reputation management’. Legal 500, 2018 9 Law in the UK only selectively implies terms into a contract. Consumer law in particular is one exception – rules around goods being of satisfactory quality etc. are well known. From 26 February this year in Scotland, a new set of rules have been added to the list. These rules have created rights for third parties i.e., people or companies who are not a party to your contract. Third party rights have existed in England for over 50 years. In Scotland we were still clinging to an ancient principle with a Latin name; jus quaesitum tertio. This set of outdated principles were deemed so unhelpful that in certain circumstances this was often the sole reason parties changed the governing law of a contract from Scots to English. Why is it important? Well there are positive reasons and negative reasons – how you perceive them depends on which side of a contract you are on at any time. First the positive ones – it is now possible to give a person (who is not party to your contract) a right or benefit under that contract without that person signing up to the contract. An example of this is if you have a group of companies and you wish your whole group to receive goods or services from a supplier but you don’t want each company to sign up to the contract. You can now specify that each of your group companies has the benefit of the supplier contract. For services such as supply of software or other services this could be very Contractors beware You know (or should know) what you are getting into when you sign a contract – the words on the page are the ones that bind you – right? Well, yes and no. Sorry, ‘typical lawyer answer’ I can hear you say but this time it’s true. 10 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 helpful and convenient. The new law implies into the contract rights to enforce and remedies for the third party. Equally if you had a dispute that you wish to settle, you could specify that each group company has the benefit of the settlement and discharge. However, these arrangements may not necessarily be attractive to all contracting parties. If you are a supplier, it might well be that you don’t want to be contracting with the whole group, perhaps where your business model relies on you having control over who you supply to. This could be for commercial reasons, such as additional licence fees or regulatory reasons. For example, you may have rules about conducting business in certain countries or you may have a process to check out people you do business with, not simply rely on them being part of an existing customer group (antibribery due diligence comes to mind). For these reasons, you may not wish the contract to benefit third parties, no matter how convenient it may initially sound. The important point about the new law is that unless you clearly exclude its effect, it will apply automatically and there is a clear risk that words in your contract might be construed as intending to give a third party a particular right. If that happens then it could be very difficult, if not impossible, to later change or cancel that right without the third party’s consent. Going forward, it may be that the safest course is to simply exclude the new law (as is often done in English contracts with their equivalent law). Even so, you need to take care to make sure that such an exclusion is valid. Therefore, an action point will be to check all of your standard form Scots law contracts to ensure that you have valid exclusion wording. Of course, some of you may already have realised that there is potential to gain an advantage over a supplier who is not savvy in Scots law and get a wider benefit from a supplier contract by not excluding the new law. If so, good luck to you. Graeme Bruce Partner T +44 141 304 6002 E 11 12 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 NATL Amusements (UK) Limited (NATL), the operators of the Showcase Cinema at Coatbridge, challenged the decision by North Lanarkshire Licensing Board to refuse their application to vary the condition in their Premises Licence which restricted the consumption of alcohol to those screens showing movies which were classified as suitable for over 18s only. The cinema, forming part of the Barrbridge Leisure Centre, has 14 screens and a bar area open to all customers. The original Premises Licence was granted in May 2015 and stated that the consumption of alcohol outside the bar area was restricted to the screening of movies classified as suitable for persons 18 and over or where the cinema restricts the screening of a movie to persons 18 and over. NATL sought to vary this condition of the Premises Licence twice and both applications were refused by the Licensing Board. The second application to vary was submitted on the basis that the restriction would remain in place prior to 7pm, but after 7pm alcohol would be permitted in all screens, irrespective of the classification of the movie being shown. This application was refused in September 2017 following an objection from Police Scotland who were concerned about there not being adequate supervision of those consuming the alcohol due to the subdued lighting in the screens and increased likelihood of disorder and the potential for harm. They considered this inconsistent with the licensing objectives of securing public safety, preventing public nuisance, and protecting children and young persons from harm. The Licensing Board further explained that the grounds for refusal included the unsuitability of the premises for use for the sale of alcohol under the proposed variation. In 2018 NATL appealed to Hamilton Sheriff Court and argued that the Licensing Board had exercised their discretion in an unreasonable manner and had reached a decision for which there was no proper or adequate factual basis. It was noted that neither party was aware of any other cinema which was subject to a similar condition. No evidence was led to show instances of harm in cinemas elsewhere and no grounds were put forward to differentiate this cinema as being at an increased risk of disorder due to its location or otherwise. The appeal was allowed and the application granted to vary the Premises Licence to permit alcohol in all screens after 7pm. Sheriff Daniel Kelly QC noted that the Licensing Board’s concerns over safety as a result of the darkness of the cinema may be commendable, but this is not sufficiently clear grounds for refusing an application to vary the Premises Licence in the absence of any justifiable, objective reason for the decision. He noted that where risks are vague and resistant to articulation, they should be given consideration but not the same stance as imminent, tangible dangers. Cinema Alcohol Licences: too dark to drink safely? A Lanarkshire cinema has recently had a decision which restricted the consumption of alcohol by adult cinema-goers to certain movies overturned. Kirsten Partridge Partner T +44 141 304 6169 E Lindsay Dougall Associate T +44 131 200 7577 E 13 The background Rock Advertising Limited (Rock) entered into a licence agreement with MWB Business Exchange Centres Limited (MWB) to occupy office space and receive services from MWB for a monthly fee. Rock failed to pay sums when due and by February 2012 Rock had fallen into arrears of more than £12,000. MWB subsequently entered into proceedings to recover those arrears. However, Rock claimed that they had agreed with MWB’s debt collectors by telephone to a rescheduling of payments. MWB, on the other hand, stated that any such oral variation would be ineffective as there was a ‘no oral variation’ clause in the licence stipulating that any variations “must be agreed, set out in writing and signed on behalf of both parties before they take effect”. In March 2016, the Court of Appeal awarded judgment in favour of Rock holding that “the most powerful consideration is that of party autonomy” and therefore parties should be free to make and unmake any contract they wish. The oral variation to the agreement was upheld and MWB appealed the decision to the Supreme Court. The judgment The appeal to the Supreme Court centred on the key question: can a written agreement, which includes a variation clause excluding oral variation, be varied other than in the terms of that clause? In other words, does the principle of freedom of contract trump express contractual provisions set out in an agreement? Lord Sumption, in his leading judgment, held that party autonomy exists up until the point a contract is made, and then the behaviour of the parties is governed by the contract. Therefore, parties are able to agree to bind their future conduct. Having a clause which excludes oral variations does not prevent parties from varying the contract, but rather gives them a clear means by which to do so. Therefore, if variation procedures set out in the contract are not followed, the contract will not be varied. Parties are still free to vary a ‘no oral variation’ clause, but would have to do this in the manner stipulated in the contract. Lord Sumption gave three justifications for this approach: 1. it prevents attempts to undermine written contract in an informal manner; 2. oral discussions can often lead to misunderstandings. This approach therefore limits disputes about whether a variation to the contract was intended by the oral discussion, or limits disputes regarding the exact terms of the variation; and 3. formalities in variation makes it easier for companies to have internal policies in place to police who can vary contracts. However, if there has been reasonable reliance on the oral variation, the principles of estoppel apply and the ‘no oral variation’ clause cannot be relied upon. However, the party would have to show real reliance on the oral agreement. There would “have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality”. Rock...paper and signature: Rock Advertising Limited’s oral variation claim fails The Supreme Court has held, in the case Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, that a clause in a contract which required that any variations to the contract must be in writing and signed, invalidated any oral agreement to vary the terms of the contract. This is an important decision to note for those managing the contracts of any business as it applies to all contracts, including supply agreements and distribution agreements. 14 | Kernel – The Scotland Food and Drink Bulletin – Summer 2018 Comment This decision provides some much needed certainty that variations must be agreed in accordance with any process which is expressly set out in the relevant agreement. This provides comfort that an agreement is unlikely to be casually or mistakenly varied. However, it is important to note that where the parties show reliance or act upon an oral variation, such variation may be deemed to be valid regardless of any variation process set out in the agreement which states otherwise. The procurement lead or contract manager should ensure that any variations to agreements entered into by the business follow any agreed formalities in the variation provisions in the relevant contract. Good practice would be to ensure that any agreement made orally should always be followed up in writing. Gillian McCulloch Associate T +44 141 304 6156 E Joy Black Associate T +44 131 200 7556 E 15 CMS Cameron McKenna Nabarro Olswang LLP Cannon Place 78 Cannon Street London EC4N 6AF T +44 (0)20 7367 3000 F +44 (0)20 7367 2000 The information held in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. 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