News Letter – August 2017 – October 2017
Inside this edition
Cloud Storage – hidden info risks
The idea of cloud storage has become more pertinent over recent years given the exponential advancement of technology. More businesses endeavour to have more ʻpaper-lessʼ environments with the view to creating more efficient, not to mention tidier, storage systems. ʻCloud storageʼ or ʻcloud computingʼ was defined by the United States Department of Commerce National Institute of Standards and Technology as a model for enabling convenient network access to a shared pool of resources, including networks, storage and applications, that can be accessed with minimal service provider contact.
Types of cloud storage
There are many different cloud storage models which each carry different risks. These include, but are not limited to, private cloud, community cloud and public cloud. Private cloud is where the cloud infrastructure provides for the exclusive use by a single organisation e.g. Cisco. Community cloud is for the use by a specific community of organisations that share the same mission e.g. Google Apps. Both the private and community clouds may be owned and managed by the organisation, a third party or mixture of both and exist on or off premises. Public cloud is for the open use by the general public and is typically owned and operated by a government department or a business e.g. Amazon.
Benefits of cloud storage
Some of the benefits for investing in cloud storage include reliable backup storage, more storage capacity, flexibility, economies of scale, more efficient professional services, reduced IT costs, fewer hardware write-offs, better quality servers, and reduced risk of losing physical files during natural disasters as has occurred in the Christchurch earthquakes.
However, with these benefits come a number of risks.
Risks of cloud storage
Client confidentiality is a core concept, for example, within the legal industry ,a lawyer has a duty to protect and to hold in strict confidence all information concerning a clientʼs business and affairs under the Lawyers and Conveyancers Act 2006 and the Privacy Act 1993. Generally, this is one of the major factors for some businesses being reluctant to implement cloud storage systems. There have been a number of unfortunate instances where private information has been disclosed; for example, in February 2015 the United States Internal Revenue Service was hacked whereby personal information of 334,000 accounts was unlawfully accessed through the online tax system.
Potentially, a cloud storage provider could have access to client information or even sell stored information to unauthorised persons. With cloud storage having no geographical boundaries, the relevant and applicable legal jurisdiction can become blurred, particularly in the context of overseas third party cloud storage providers. Cloud storage providers may require ownership of the stored data to protect their interests and may provide information to government agencies when requested. In light of this, when engaging services of cloud storage providers, the terms and conditions of any agreement should be carefully considered. Further, a cloud storage provider would need to be capable of customising software for, by way of example, the legal industry, and adapting to its changes. Local cloud storage providers may have the flexibility to provide this; however, they may not offer the same technology and financial security as overseas cloud providers.
Anyone who engages the services of a cloud storage provider must ensure that client confidentiality will not be compromised and all reasonable steps have been taken to ensure third parties or hackers cannot access client data. Accordingly, clients should be informed that their personal information is held with a third party.
Methods to mitigate cloud storage risks
Even with all the necessary precautions in place, breaches may still occur. However, there are ways to mitigate the risks associated with cloud storage; examples include implementing the necessary agreements for acceptable service levels and remedies for non-compliance and conducting due diligence of service providers; creating strict restrictions and security on access to information; enforcing terms for the transfer of data; and knowing where the data will be stored and the privacy laws applicable. Backup systems for damage control must be established and highly confidential information could be stored in a different manner to low risk information.
The decision to invest in cloud storage is a balancing act between the efficiencies of technology and the potential risks associated with privacy in the light of business strategy and priorities.
The Corporate Veil
Section 15 of the Companies Act 1993 (“Act”) states that a company has a legal personality in its own right and is separate from its shareholders. This is a principle known as the Salomon principle, originating from the case of Salomon v A Salomon & Co Ltd. The Salomon principle provides that a company is essentially regarded as a legal person separate from its directors, shareholders, employees and agents. This means as a separate legal entity, a company can be sued in its own name and own assets separately from its shareholders.
The corporate veil is drawn from the Salomon principle which separates the rights and duties of the company from the rights and duties of the shareholders and directors. Essentially, the corporate veil is a metaphoric veil with the company on one side of it and its directors and shareholders on the other and liability does not pass through.
The corporate veil does not provide protection to its shareholders and directors for their personal conduct or allow companies to be used for sham transactions. Accordingly, the courts may lift or pierce the corporate veil.
The corporate veil and Salomon principle were applied in Lee v Leeʼs Air Farming Ltd. The Court ruled that although Lee was the controlling shareholder, sole director and chief pilot of Leeʼs Air Farming Ltd, he was also considered an employee of the company and thus the company was a separate legal entity, even though Leeʼs Air Farming Ltd was essentially a ʻone-man entityʼ. This ruling created the opportunity for the corporate veil to be misused and has since been regulated against by imposing reckless trading provisions.
Lifting the corporate veil
The corporate veil can be lifted by the courts if its presence would create a substantial injustice. This is the process used to look behind the corporate façade and identify the true nature of a transaction.
The corporate veil may be lifted in a number of circumstances, for example where a subsidiary company is in liquidation in the context of a group of companies as illustrated in Steel & Tube Holdings Ltd v Lewis Holdings Ltd. The subsidiary company was placed into liquidation and the plaintiff sought the debt owed by the subsidiary from the group of companies rather than the subsidiary as a separate entity. The Court of Appeal agreed with this approach as the subsidiary was not run as a separate legal entity. Some of the factors the Court considered were that the directors of the subsidiary managed the subsidiary as officers of the parent company and did not hold separate board meetings for the subsidiary. Technically, the subsidiary was a separate legal entity but it was not managed as a separate entity. Accordingly, the Court lifted the corporate veil to pool the assets of the related companies. The courts may not always apply this approach to groups of companies but this case identifies the importance of ensuring each entity within a group of companies is managed as a separate legal entity.
Piercing the corporate veil
The Courts may pierce the corporate veil and remove the protection of the Salomon principle to prohibit fraud. This was evident in Gilford Motor Co Ltd v Horne where a managing director agreed not to engage with his former employerʼs customers but proceeded to do so through a newly formed company. The courts pierced the corporate veil to reveal the sham transactions occurring behind the façade of the company.
Generally, the courts are reluctant to pierce the corporate veil to protect creditors in the absence of fraud. However, where reckless trading takes place by directors, s 135 of the Act allows for the veil to be pierced.
In the case of tax evasion or unauthorised tax avoidance, the courts may look past the Salomon principle, pierce the corporate veil and declare the company a sham.
The courts will only lift or pierce the veil where an inequitable situation may be occurring behind the corporate façade based on the facts of each case. The corporate veil is vital for the legitimate use of the corporate structure and the protection of shareholders and directors and thus, by its very existence, promotes the playing field for taking commercial risks.
Domestic Violence Victims Protection Bill
Domestic violence (“DV”) has proven to be a significant issue in New Zealand. For example in 2016, the New Zealand (“NZ”) Police investigated 118,910 incidents of family violence, that equates to approximately one DV incident every five minutes. The most recent parliamentary debate on the issue has resulted in The Domestic Violence – Victimsʼ Protection Bill (“Bill”), originally proposed by the Green Party, which had its first reading in March 2017. This Bill aims to offer greater protection to victims of DV (“Victim/s”) in an employment context. The Bill aims to reduce:
The stigma attached to being a Victim;
The abuse of Victims in the workplace; and
To require employers to adhere to more understanding practices.
The Bill proposes to assist Victims by introducing a definition of, “a victim of domestic violence” under section 5 of the Bill and amending several different pieces of employment legislation to better cater to the needs of Victims.
The Bill defines a Victim as a person who suffers DV who can produce a “domestic violence document” (“DVD”) because they have suffered DV or provide care to an individual in their immediate family who suffers DV. A DVD is a collection of documents that provide evidence that a person falls within the definition of a Victim. Examples of these documents are a police report or criminal proceedings.
The proposed changes to employment legislation are the introduction of DV leave, flexible working for Victims, Health and Safety Requirements and new prohibited grounds of discrimination. These are described below.
DV leave: The Bill proposes to amend the Holiday Act 2003 by introducing ten days within a 12 month period paid “domestic violence leave” for Victims. To be eligible, the person must supply their employer with their DVD. The employer will be expected to approve the leave “as soon as practicable”.
Flexible working for Victims: The Bill proposes to amend the Employment Relations Act 2000 so that Victims can request flexible working arrangements such as working from a different location or unusual hours. Employees who make this request will need to have been employed by the same employer for at least six months and have not made a flexible working request for at least 12 months.
Health and Safety Requirements: The Bill proposes to amend the definition of “hazard” to include situations arising from DV. This would require persons conducting a business or undertaking (PCBUʼs) to have a policy for dealing with hazards that arise in the workplace due to DV. A PCBU will also have to take reasonable and practicable steps to provide health and safety representatives with training to support workers who are Victims.
Prohibited grounds of discrimination: The Bill proposes introducing being a Victim as a prohibited ground of discrimination under the Human Rights Act 1993 and the Employment Relations Act 2000.
The current government states that this Bill is seeking to remedy something that has already been addressed by the existing provisions within current Employment and Health and Safety legislation. Immigration Minister Mr Woodhouse also stated there was no need for the initiative as many employers go above the minimum employment standards; for example, Countdown already offers ten days DV leave.
The discussion above suggests that the current government is content to leave more comprehensive DV initiatives to businesses. They have voiced the opinion that they believe the extra leave will burden small businesses and therefore do not support the Bill in its current form. However, leaving the instigation of DV initiatives to businesses may result in Victims only receiving the limited support offered by current legislation.
Currently, it is estimated that DV is costing $368 million or more a year particularly through lost productivity, businesses losing staff, and retraining. The Human Rights Commission has launched a campaign to encourage businesses to introduce more comprehensive family violence policies in their workplaces. Equal Employment Opportunities Commissioner Dr Jackie Blue states “By implementing a family violence policy, the cost savings to the business will be truly significant but crucially, for victims, it can be life-changing and life-saving.”
Where many New Zealand businesses are going beyond the current legislation to provide support to Victims, some are not. This Bill, if passed into law will recognise DV as a workplace hazard and accordingly, require New Zealand businesses to implement new workplace policies. So, with the report from Parliament due on 8 September 2017, this is one space to watch.
Why is competition law important? – NZME and Fairfax media merger case study
What is Competition Law?
Competition law promotes or seeks to maintain competition in marketplaces. It does this by restricting anti-competitive trade practices, mergers and business acquisitions, and economic regulation.
Why is Competition Law Important?
The Ministry of Business, Innovation and Employmentʼs (“MBIE”) Report titled “Competition in New Zealand Industries: Measurement and Evidence” (the “Report”) submits that competition in the market can create a positive relationship between profits and productivity for businesses. An increase in competition stimulates managerial efforts and promotes businesses to be more innovative which increases productivity over time. As competition increases, the less efficient businesses tend to exit the market, encouraging quality products within the market. In contrast, a lack of competition arguably results in an average performing economy due to the absence of competition as a driver towards productivity and quality.
The Report addresses the possibility of high levels of competition decreasing the productivity and quality of the market place. However, studies of the relationship between competition and innovation often show that a majority of markets would perform better with the competition. The Report records that New Zealand markets are small and isolated due to New Zealandʼs geographical position. Therefore, increased competition is likely to stimulate rather than curtail innovation.
New Zealand Commerce Commission
The Commerce Commission (“the Commission”) operates under the Commerce Commission Act 1986 and monitors and governs competition in the markets. The Commission examines anti-competitive practices such as agreements between businesses that have the potential to increase prices or reduce the choice of goods or services. A relevant case study is the application for a merger between the two largest news companies in New Zealand, New Zealand Media and Entertainment (“NZME”) and Fairfax New Zealand (“Fairfax”).
Merger between NZME and Fairfax
In late 2016, NZME and Fairfax proposed a merger between the two companies which would see NZME paying Fairfax Australia $55 million if the merger was allowed.
Allegedly, the merger was proposed due to Fairfaxʼs falling revenue. Fairfax Australia reported that for the New Zealand Branch revenue fell 8 percent for the last six months of 2016 and its operating profit dropped 10 percent due to a consumer shift from traditional media sources to online media sources. Greg Hywood, the Chief Executive of Fairfax Australia, said that they had plans to restructure Fairfax into a more sustainable business model if the merger was not approved.
Despite Fairfax explaining their market challenges to the Commission, the Commission gave a preliminary “no” to the merger on 8 November 2016. They then rejected the merger completely on 2 May 2017. The decision released by the Commission stated that if the merger were allowed to proceed it would result in, “an unprecedented level of media concentration for a well-established democracy.” Due to the extent of the two organisations' investments, the Commissionʼs decision reports that the merger would be likely to lessen competition by increasing prices and/or decreasing quality for the readers and/or advertisers in advertising and reader markets, and as a result, the merger should not be cleared.
Fairfax has now appealed the decision of the Commission to the High Court on the basis that the Commission exceeded its authority by considering social and political considerations. The companies also reported that the Commission had breached procedure due to the anonymity and confidentiality afforded to the parties that made submissions against the merger. The companies allege that the Commission had breached the principles of natural justice and procedural fairness. The High Court process began at the end of May; there have been no further updates.
Without competition law regulating mergers, the merger between NZME and Fairfax would not have been questioned and the possible consequences would not have been explored. The NZME and Fairfax case study demonstrates that competition law can assist in protecting consumers and citizens alike and, therefore, is very important to the development of our economy and society at large.
Personal Lending Guarantees – Enforceability
A Guarantor is a person who gives a promise to repay the debt of a borrower. By agreeing to pay a debt the Guarantor has made a guarantee to the institution or person lending the funds (“lender”). Frequently when someone gives a guarantee they are also giving an indemnity. An indemnity is a contractual promise to accept liability for any loss by the lender that is accumulated in the process of the recovery of a debt.
There are different types of guarantees: unlimited, limited, unsecured or secured. An unlimited guarantee generally gives the lender an ability to demand the Guarantor repays all monies owing, whereas a limited guarantee has an agreed amount payable by the Guarantor. An unsecured guarantee is not attached to any particular asset of the Guarantor. In contrast, a secured guarantee grants security over a specific asset owned by the Guarantor, e.g., their house.
Personal guarantees are becoming more common in the parent-child scenario. However, the parents sometimes underestimate the extent of the risk they assume when signing a guarantee. Regularly, the guaranteed loan represents a large portion of the parentsʼ assets and therefore may have significant consequences on the parentsʼ current and future living standards if the lender demands payment of the debt. It is important to note that a personal guarantee is not for a specific timeframe. Therefore, the Guarantor may be liable for any current loans, future financing or credit card debts.
Guarantees are legally binding documents and are enforceable through the Courts. Extinguishing the obligations under a guarantee can be difficult as the parties must adhere to the terms and conditions of the guarantee. Guarantors may request the lender to release them from their liability under the guarantee; however, it is the lendersʼ decision to release a Guarantor from their obligations under the guarantee.
In the case Tait-Jamieson v Cardrona, Mr Tait gave a personal guarantee for the debt owed by a local organisation to Cardrona Ski Resort (“Cardrona”), however, did not sign the written guarantee prepared. When Mr Tait realised that he had not signed the guarantee he conveyed to Cardrona in verbal and written form that regardless of him not signing the guarantee he would underwrite the debt. Cardrona subsequently demanded payment of the debt from the Guarantors. Mr Tait stated that the guarantee was not enforceable against him as he did not sign the written guarantee. However, the Court held that Mr Tait had adequately expressed his intention to be contractually bound by the guarantee by his previous verbal and written correspondence and therefore must honour his obligations under the guarantee.
Tait-Jamieson v Cardrona demonstrates that once a person sufficiently expresses an intention to be bound by a guarantee, the guarantee is likely to be enforceable. However, in New Zealand, lenders who offer guarantees must also adhere to the responsible lending laws of the Credit Contracts and Consumer Finance Act 2003. These state that lenders must ensure a borrower, or Guarantor, is likely to be able to make repayments towards the debt without suffering substantial hardship. This legislation was applied to the case of a pensioner who agreed to guarantee his sonʼs loan of $2,000.00. His son defaulted on the weekly payments immediately. The lender demanded the repayments from the pensioner which would have left a residue of $25.25 of his pension payment per week. The case was heard by Financial Services Complaints Limited which found that the pensioner was not a suitable Guarantor and that the lender had breached their duties under the responsible lending laws. The judgement resulted in the lender discharging the pensioner's liability under the guarantee.
Therefore, while guarantees are frequently enforceable, there is an expectation that lenders will act responsibly when assessing the viability of a Guarantor.
Finally, below are some considerations to contemplate before becoming a Guarantor:
Receive independent legal advice;
Make sure you understand the wording of the written guarantee;
Be aware that the lender does not have to pursue the borrower “to the ends of the earth” before turning to the Guarantor for repayment of the debt; and
If possible, engage in a limited guarantee to try and minimise any potential risk.
“The Ruck – a Lawyerʼs analysis of the rules of rugbyʼs ruck.”
All Black, Richie McCaw, ended active play many times by successfully tackling the opposing teamʼs ball carrier to the ground. Quickly joined by his team mates who bind together over the ball, each teamʼs players use their feet to play the ball. The winners of the ruck are the team that can drive the ball behind to the rear playerʼs back foot where it can be picked up and passed along. Offside lines for each team are drawn at the opposing rear playerʼs feet, and any encroaching team risks a penalty. As a result, the ruck has a material impact on the ability for teams to contest ball possession.
But what happens if the defending side chooses not to ruck?
Earlier this year, in a controversial match between Italy and England, Italy chose not contest any rucks. As a result, there was no offside line, and the Italian players were able to obstruct the flow of the game. The All Blacks use the rule more subtly with about half their tackles transitioning into rucks. It is also why many argued Richie McCaw was offside.
Therefore, rucking, or a lack of, seems to be wholly legal and within the black letter law of rugby.
Quirky Commonwealth Laws
Legislation does not always keep up with society so archaic but quirky laws of the Commonwealth remain on the statute books as shown in the examples below.
a) United Kingdom:
Under the metropolitan Police Act 1839 it is illegal to beat or shake any carpet or rug in the street. However beating or shaking a doormat is allowed before 8am; and
Under the Salmon Act 1986 it is illegal to handle salmon in suspicious circumstances.
The Summary Offences Act 1966 states that it is an offence to fly a kite or play a game in a public place “to the annoyance of another person”; and
The Marketing of Potatoes Act 1946 states that it is illegal for a distributor of potatoes to be in possession of more than 50kg of potatoes that are sourced from a person or organisation other than the Potato Marketing Corporation.
It is apparent that the world moves on and people forget to clean up the statute books. Because repealing these laws does not seem to be a priority, these quirky laws seem to be here to stay.