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  • Lovely jubbly: the Intellectual Property Enterprise Court finds that Del Boy is a literary work

    Lovely jubbly: the Intellectual Property Enterprise Court finds that Del Boy is a literary work

    BBC sitcom Only Fools And Horses might have broadcast its last episode almost two decades ago, but that hasn’t stopped Del Boy and co from having their day in court.

    The Intellectual Property Enterprise Court case of Shazam Productions v Only Fools the Dining Experience [2022] EWHC 1379 IPEC is notable for stating for the first time in English law that copyright can exist separately in a character and not only the script. The case concerned copyright infringement of John Sullivan’s genius writing of Only Fools And Horses (OFAH) quoted throughout the judgment.

    In short, Del Boy has made legal history. Shazam Productions Limited (Shazam) was formed by the late John Sullivan, who owned the rights to the OFAH scripts. His family continues to licence those rights, for instance to the BBC, which had originally produced the TV series, and for a successful West End theatre version of OFAH.

    The Dining Experience and others had created a theatrical experience for its audience by providing an interactive three-course meal, while actors played the characters of Del Boy and his young brother, Rodney. The actors had the appearance, behaviour, voice and phrases of OFAH characters.

    Although the Dining Experience created a script, it used jokes from the original series. The characters were also replicated, albeit, according to the defendants’ evidence, in an exaggerated way. The Dining Experience also used the music and lyrics written by Sullivan from the OFAH TV show.

    The judge analysed recordings of OFAH whilst reading their scripts. Although the scripts were acted by a stellar cast, the character development was clearly set out on the page. Sullivan’s scripts served as a diecast for the distinctive characteristics of the characters, especially Del and Rodney Trotter. With Del Boy, there was the mispronounced French and stock phrases such as ‘Lovely jubbly’ and ‘Cushty’. The character was indiscernible from the script and its dialogue.

    The characters were not clichés or tropes either, but fully rounded with their DNA set out in the writing. The thoroughness of the characters was such that the presiding judge was satisfied the character was a literary work for copyright purposes.

    The judge did not create new law but applied it for the first time in England by following the test for subsistence of copyright identified in European Union (EU) law. This is a two-prong test fulfilling the ‘originality requirement’, namely being the author’s own intellectual creation, and ‘identifiability requirement’, whereby the character manifests itself in an identifiable manner that is objectively unique and distinguishable from another character. Although an EU law test, it pre-existed Brexit so remains part of English law.

    Further, the court determined Del Boy’s character was a literary work under UK copyright law, which has a closed list of works that can be subject to copyright. As an aside, the EU test of subsistence of copyright law (still valid UK law) does not allow a closed list as exists under UK copyright legislation.

    The Shazam case demonstrates that careful character development and embedment within scripts may create an additional copyright in the character, separate from the overall script. Rights-holders of the most identifiable fictional icons from TV may wish to consider whether copyright exists in their characters.

    Apart from copyright protection, the Shazam decision lends support to a ‘passing-off’ action where the copyright owner asserts their goodwill associated to a character. Therefore, any unauthorised attempt by a third party to portray a character may be regarded as by giving the impression their use was endorsed by the copyright owner.

    There may also be circumstances where a distinct character can enhance the existence of format rights, normally a ragbag of detailed rights and creations such as set designs, trademarks and intricate format bibles assiduously recording the facets of a show.

    So there it is. Character-led drama and comedy create not only masterpieces but additional IP rights, if your characters display sufficient distinctiveness. Lovely jubbly.

    This article was written by Julian Wilkins, an Intellectual Property solicitor at Eldwick Law.  It was recently published in Television International Business.

  • Claims against a Director for Breach of Duties

    Claims against a Director for Breach of Duties

    If a director breaches these duties, it may be possible for shareholders to bring a claim. Contact one of our solicitors.

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    What are the directors’ duties?

    The general duties of a company director are found in sections 171-177 of the Companies Act. They are:

    • A company director must act per the company’s constitution and only exercise their powers for the purposes for which they are given (section 171).
    • A company director must act in good faith and promote the success of the company for the benefit of its members (section 172 (1)).
    • A company director must exercise independent judgment. They may take on board the advice or opinion of others, the ultimate decision must be theirs (section 173).
    • A company director must exercise reasonable care, skill, and due diligence when undertaking their duties (section 174).
    • A company director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe the company and either their personal interests or other duties owed to a third party (section 175).
    • A company director must not accept any benefits which are conferred on them due to their position as a company director (section 176).
    • If a company director has an interest in a proposed transaction or arrangement with the company this must be declared to any fellow directors (section 177).

    Examples of breach of directors’ duties cases

    • In 2019, ClientEarth sued, as a minority shareholder, Polish energy company Enea alleging that the company’s strategy to build a 1GW coal-fired power station in northeast Poland as part of a joint venture with another Polish energy firm, Energa posed an indefensible risk to investors in the face of rising prices for carbon and growing demand for renewables. Moving forward with the project would constitute a breach of the board of directors’ fiduciary duties of due diligence and acting in the best interests of the company and its shareholders.
    • In Fairford Water Ski Club v Cohoon [2021] EWCA Civ 143 the director of a company that owned a lake and surrounding land was ordered to repay £350,000 after failing to declare his interest in a water skiing school that operated on the lake at a particular directors’ meeting.

    Breach of directors duties penalties

    What can be imposed?

    There are several sanctions the court can make if a director is found to have breached their duties, including:

    • Damages – if the director has been negligent in performing their duties they may be required to pay damages to the company.
    • Injunctions – an injunction order can be made to prevent a director from conducting a breach or continuing to breach their duty.
    • Restoration of property and/or profits – the court can order a director to return property and/or repay any profits gained through the breach.
    • Reversing of a contract – if a director signs an agreement that goes against the company’s intentions it can be rescinded.

    Can the company ‘forgive’ a director for a breach of duty?

    Yes, section 239 regulates the company’s right to ratify (forgive) conduct by a director amounting to negligence, default, breach of duty, or breach of trust in relation to the company. The ratification decision must be made by resolution of the members and neither the director nor anyone connected with them can be part of the resolution.

    Most importantly, a breach of duty that results in a decision that threatens the solvency of the company or causes a loss to its creditors cannot be ratified.

    In cases of negligence, default, breach of duty, or breach of trust claims, the court can relieve a director of liability in whole or in part if:

    • They acted honestly and reasonably, and
    • Having regard to all the circumstances of the case, the court believes it is reasonable to excuse the director.

    Concluding comments on breaching directors duties

    Civil litigation in cases involving directors’ duties is a highly complex area of law and requires the involvement of commercial disputes solicitors.

    Take for example the Enea case mentioned above which concerned shareholders bringing a claim against the board for, in broad terms, failing to consider environmental and climate change matters in their decision making.
    These types of directors’ duties claims are guaranteed to rise as the science around the impact of company actions on climate change becomes clearer.

    This, and other types of directors’ duties claims, such as conflicts of interests or negligence, can involve cross-border and joint venture elements, adding to the complexity of the matter.

    If you are facing a regulatory or criminal investigation or prosecution, seek experienced legal advice immediately.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect the law in place at the time of writing, 19 January 2024. This article does not constitute legal advice. For further information, please contact our London office.

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  • What Should I Do if My Assets are Frozen?

    What Should I Do if My Assets are Frozen?

    In April 2022, Swiss prosecutors announced that they would release around 400 million Swiss francs which had been frozen in a Swiss bank account for several years. The money belonged to five unidentified people who were being investigated by Swiss authorities on suspicion of money laundering. The original investigation concerned 14 people, among them members of the late former Egyptian President Hosni Mubarak’s circle. More than 210 million francs had been released at an earlier phase of the investigation. Prosecutors concluded after eleven years that there was not enough evidence to support claims that those under investigation were involved in organised crime and money laundering.

    Having property and/or assets frozen due to targeted sanctions or being investigated or prosecuted for criminal activity such as money laundering, fraud, terrorist financing, or other organised criminal activity can not only affect you personally, but also your family, employees, business partners, and suppliers. In this article, we explain what a freezing order/injunction is and what you can do to have the order lifted.

    What is a freezing order?

    A freezing order, also known as a Mareva injunction, is a court order which prevents the defendant from dealing with, or disposing of, property or assets mentioned in the order. It is important to note that, as confirmed in the Court of Appeal decision in Crowther v Crowther [2020] EWCA Civ 762, a freezing order is not meant to provide the applicant with security for their claim, instead, its purpose is to prevent a defendant from evading justice by disposing of an asset so that a future judgment against them cannot be satisfied.

    Freezing orders are not handed down lightly. They are known as the “nuclear weapon” of the law (Bank Mellat v Nikpour (1985) FSR 87) and the court will only use its discretion to grant a freezing order if it is just and convenient to do so.

    A freezing order can be made without you receiving any prior notice (known as ex-parte). It is important to understand that the injunction does not mean that you have been found liable or that your assets no longer belong to you. However, your day-to-day life will likely be immediately impacted by the order. Therefore, the first thing you must do is contact a solicitor who is experienced in the variation and discharging of freezing orders. They will examine the details of the injunction and advise you on what you can and cannot do with your assets.

    Within a week or so of the order being granted, you will be required to attend a hearing known as a ‘return date’. In practice, it is up to you to provide reasons that the injunction should be varied or discharged. Unless there is a clear reason for the injunction to be lifted, for example, it has been made against the wrong person, strategically it can be beneficial to allow the freezing order to remain in place whilst your solicitor gathers the evidence required to make a robust challenge. The priority at this stage is securing access to funds to pay your day-to-day living expenses and legal fees.

    What type of assets can be frozen?

    Most types of assets can be frozen, including cars, stocks and shares, property, art, cryptocurrency, business assets, and bank accounts. The order covers existing assets and those acquired whilst the freezing order is in place.

    A freezing order can apply within the UK and/or in specific foreign countries. It is even possible to obtain a worldwide freezing injunction.

    How are third parties affected by freezing orders?

    One of the main reasons the courts require vigorous evidence when it comes to granting freezing orders is that third parties such as banks, insurance companies, suppliers, and business partners (to name but a few) can be negatively affected.

    If a third party possesses assets which are subject to a freezing order they must comply with the injunction and ensure they do not allow the person subject to the order to commit a breach. Breaching the freezing order can result in a fine, asset seizure or imprisonment, not to mention the reputational damage if details of the breach are reported in the media.

    How can I have a freezing order varied or discharged?

    A freezing injunction can be varied or discharged either by consent or via a court application.

    Consent

    The freezing order may allow parties to agree to vary its terms or discharge it. The main benefit to variation or discharge by consent is that it is less expensive than making an application to the court and negotiations can remain confidential.

    Your solicitor will advise you as to whether the terms of the freezing injunction allow for variation or discharge by consent. If the claimant unreasonably withholds consent and an application to the court is required, the judge may order the claimant to pay your legal costs if you win your case.

    Application to the court

    The court can vary or discharge a freezing order following an application by you or a third party affected by the injunction because:

    • The claimant has not done what the court required them to do when granting the freezing order, for example providing the required information and authorisation to your bank to ensure you can access reasonable funds to cover living expenses.
    • The terms of the injunction are deemed oppressive.
    • The claimant is delaying pressing ahead with their claim. Lord Justice Glidewell stated in the case of Lloyds Bowmaker Ltd v Britannia Arrow Holdings [1988] 1 W.L.R. 1337, that “a plaintiff who succeeds in obtaining a Mareva injunction is in my view under an obligation to press on with his action as rapidly as he can so that, if he should fail to establish liability in the defendant, the disadvantage which the injunction imposes on the defendant will be lessened so far as possible.”
    • The claimant has not provided full disclosure to your legal team.

    When applying for a freezing order the claimant will normally be required to provide a ‘cross-undertaking’ (promise) to financially compensate you and any third parties affected by the freezing injunction should it turn out it was improperly obtained.

    Wrapping up

    Varying or discharging freezing orders requires your solicitor to engage in smart tactics and the ability to successfully do this only comes with experience. For example, putting a claimant on notice that you plan to sue for damages as evidence shows that the injunction should not have been granted often motivates the claimant to consent to a variation or discharge. Therefore, swiftly instructing an experienced litigation solicitor is key to dealing with all legal aspects of a freezing order.

  • Practical Implications of the Supreme Court’s Decision in BTI v Sequana SA

    Practical Implications of the Supreme Court’s Decision in BTI v Sequana SA

    The Supreme Court has handed down its long-awaited judgment, which as Lord Reed noted, considered issues that go to the heart of our understanding of company law and are of considerable practical importance to the management of companies.

    Background to the Appeal

    In May 2009, the directors of a company called AWA caused it to distribute a dividend of €135 million to its only shareholder, Sequana SA (“Sequana”) extinguishing almost the whole of a larger debt Sequana owed to AWA. The dividend complied with the statutory scheme regulating the payment of dividends and with the common law rules. At the time the dividend was paid, AWA was solvent, however, it had a long-term contingent liability of an uncertain amount, which gave rise to a real risk, albeit not a probability, that AWA would become insolvent at an uncertain date in the future.

    This risk materialised ten years later, and AWA went into insolvent administration. The appellant, AWA’s assignee BTI 2014 LLC (“BTI”) sought to recover the dividend amount from AWA’s directors. BTI argued that the payment of the divided was in breach of their fiduciary duties because the directors had not considered or acted in the interests of AWA’s creditors. Both the High Court and Court of Appeal rejected the creditor duty claim. In the judgment of the Court of Appeal, it was held that the creditor duty did not arise until a company was actually insolvent, on the brink of insolvency, or probably headed for insolvency. BTI appealed to the Supreme Court.

    The Supreme Court’s Decision

    The judgment of the Supreme Court unanimously dismissing the appeal consists of four separate judgments, which consider at length the existence, content and engagement of the so-called “creditor duty”. Although the reasoning in each of the judgments vary, we have detailed below what can be considered as the key takeaways:

    • A creditor duty is owed by the directors of a company. The Supreme Court held that the creditor duty should be affirmed due to its existence being preserved by section 172(3) of the Companies Act (imposing a director’s duty to, in certain circumstances, consider or act in the interests of company creditors) and a long line of UK case law.
    • The interests of creditors are the interest of the company’s creditors as a whole. Once the creditor duty is engaged, directors should consider the interests of creditors whilst balancing them against the interests of shareholders where they conflict. However, where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.
    • As to when the creditor duty will be triggered, the majority held that the creditor duty is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation is probable.
    • The creditor duty can apply to a decision by directors to pay a dividend which is otherwise lawful.

    The Practical Implications

    The Supreme Court has provided clarification that the creditor duty exists, however, the exact point at which this duty will be triggered is not as clear. Although the Supreme Court has held that the creditor duty is not triggered by a mere risk of insolvency which is neither probable or imminent, the exact point at which a real risk of insolvency becomes a probable one is unclear.

    The Supreme Court appears to have preferred a ‘sliding-scale’, with the priority given to the creditors’ interests increasing as the company’s financial difficulties become more serious until the point at which insolvency is inevitable meaning that the creditors’ interests become paramount. Whilst it is true that many companies who experience financial difficulties slowly slide into insolvency, this nuanced approach is difficult to apply in practice.

    Directors are therefore encouraged to take a cautious approach to the duties they owe to creditors particularly when considering the point at which the creditor duty is triggered.

  • Restrictive Covenants: How Far Can a Franchise Owner Go?

    Restrictive Covenants: How Far Can a Franchise Owner Go?

    Franchising is an industry that is expanding in popularity, particularly within the UK where the number of franchised businesses has substantially increased. Given the competitiveness within the industry, many franchisors seek to impose what are known as restrictive covenants on their franchisees.

    What are restrictive covenants and are they enforceable?

    Restrictive covenants are contractual conditions that restrict, limit, prohibit, or prevent the way in which one party can act.

    Restrictive covenants are common in franchise agreements and usually take the form of restricting and preventing a franchisee from operating a competing business after the franchise agreement comes to an end.

    The question is the extent to which they are enforceable. The Court’s approach to restrictive covenants founded in Nordenfelt v Maxim Nordenfelt Guns [1894] AC 535, is that restrictive covenants are enforceable when, with reference to the interest of the parties concerned, the restraint goes no further than is necessary to protect a legitimate interest.

    Recently, the Court of Appeal in Dwyer (UK Franchising) Limited v Fredbar Limited & Shaun Bartlett  [2022] EWCA Civ 889 has expanded on the factors to be considered when determining whether a restraint of trade is reasonable by confirming that inequality of bargaining power is a significant factor in determining reasonableness.

    Bargaining power in the context of restrictive covenants

    A franchisor holds the most power when it comes to negotiating a franchise agreement. Franchise agreements are often prepared in a standard form, which limit a franchisee’s ability to seek amendments to suit their individual needs.

    The Court of Appeal contextualised this as being a total inequality of arms, particularly when there was no evidence of any discussions or negotiations and the franchise agreement had to be accepted or rejected in its standard form.

    In Dwyer the post termination covenant prevented the franchisee from being engaged in a business similar to or in competition with the franchisor’s plumbing and draining business within either (i) the territory for which the franchisee had been granted exclusivity; or (ii) a radius of five miles from that territory.

    The Court of Appeal upheld the High Court’s decisionthat the restraints were unreasonable, making the point that the parties’ background circumstances, and what they objectively contemplated when the contract was made, were relevant considerations when assessing reasonableness. In this case, the franchisor was a major business whereas the franchisee was essentially a “man with a van”.

    As the contract was presented as take it or leave it, the Court of Appeal held that the inequality of the bargaining relationship meant that the contract was akin to an employment relationship rather than a commercial relationship.

    Concluding remarks on Franchise Law

    Given the Court of Appeal’s recent decision it is important for franchisors to take into consideration the bargaining power they hold over the contents of a franchise agreement.
    The courts are now willing and keen to consider the specific circumstances of the parties, including the degree of risk undertaken by a franchisee, which includes the financial impact the failure of a franchise may have when determining whether a restrictive covenant is reasonable.

    How far a franchisor will be compelled to make enquiries into a potential franchisee’s personal financial circumstances is yet to be determined.

    Should you have any queries with regard to this article, please do not hesitate to contact our franchise solicitors  Waleed Tahirkheli and Jenna Krüger. Alternatively, you can contact our offices on +44 (0) 203 972 8469.

  • Sanctions – Can I Have My Name Removed From A Designated List?

    Sanctions – Can I Have My Name Removed From A Designated List?

    Introduction

    The power of the UK, US, and the EU to freeze assets and prevent funds or assets from being made available or used for the benefit of a sanctioned person, entity, or body should not be underestimated. Since 9/11, the weaponisation of finance through the imposition of sanctions has risen exponentially. Although the focus at present is on the sanctions being imposed on Russian businesses and people, other countries, notably Iran, have been subjected to sanctions aimed at squeezing the state out of the world’s financial system.

    The Obama administration imposed restrictions on Iran’s central bank which put pressure on the country to negotiate the 2015 deal concerning its nuclear programme. In the UK, the Iran (Sanctions) (Nuclear) (EU Exit) Regulations 2019 “provide for the freezing of funds and economic resources of certain persons, entities, or bodies responsible for the proliferation or development of nuclear weapons in, or for use in, Iran.”

    Asset freezing is not restricted to alleged political and human rights violations. It is also used against people, entities, or bodies who are suspected of money laundering or in cases where a UK enforcement agency believes, on the balance of probabilities, there are reasonable grounds to suspect certain assets and/ funds are the proceeds of crime or are intended for use in unlawful conduct. Certain people/groups subject to financial sanctions are also deemed terrorist organisations and face parallel counter-terrorist finance measures.

    In this article, we examine how a designated person can challenge the inclusion of their name on a sanctions list to release their assets and end any other financial prohibitions related to their interests.

    How does an enforcement body freeze assets in the UK and internationally?

    The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) enables the UK government to impose economic and other sanctions as well as pass anti-money laundering regulations.

    If a person, entity, or body has had its assets frozen no one will be able to:

    • Deal with the funds or economic resources belonging to, owned, held, or controlled by the designated person, entity, or body.
    • Provide funds or economic resources, directly or indirectly, to, or for the benefit of, a designated person, entity, or body.
    • Knowingly participate in activities that circumvent the sanctions in order to make funds available to the designated person, entity, or body.

    Financial sanctions may also forbid anyone from providing or performing banking, insurance, and other financial services to a designated person, entity, body, or country.

    It is important to note that asset freezes and financial sanctions can apply not only to designated people but to any entity which is “owned or controlled, directly or indirectly, by a designated person”. Examples of ownership or control may include a designated person holding over 50% of the voting rights in a company or having the power to appoint or remove a majority of the Board.

    What are the penalties for breaching financial sanctions?

    Breaching financial sanctions can be punished by criminal and civil penalties. The Police and Crime Act 2017 provides for a maximum sentence of seven years imprisonment for breaching financial sanctions. The Office for Financial Sanctions Implementation (OFSI) can also impose financial penalties on those who breach sanctions. Financial penalties can range from 50% of the total breach up to £1 million; whichever is the greater value.

    Another penalty which can be imposed on a person, entity, or body that breaches financial sanctions is the issuing of a Serious Crime Prevention Order (SCPO). A SCPO is a civil injunction aimed at preventing serious crime and can include any restriction or requirement that the court sees fit to impose.

    Can inclusion on a sanction designations list be challenged?

    The method of challenging being named a designated person on a sanction list will depend on the source of the sanction list, namely the UN Security Council, the Council of the European Union, or the UK government.

    UN sanctions listing

    Under SAMLA, a person designated under a UN sanctions listing can request that the UK Government seek to have their name removed from the list. If the government refuses, the person may apply for judicial review. If the High Court rules that the government acted unlawfully, the government can be ordered to use its best endeavours to have the person de-listed, however, the court cannot order the listing to be quashed.

    In R (Youssef) v Secretary of State for Foreign, Commonwealth and Development Affairs [2021] EWHC 3188 (Admin) the claimant challenged the continued application of the assets-freezing regime imposed on him by the ISIL (Da’esh) and Al-Qaida (United Nations Sanctions) (EU Exit) Regulations 2019 as being incompatible with the right of access to a court guaranteed by Article 6 of the European Convention on Human Rights (ECHR) and the right to private and family life protected by Article 8 ECHR. The High Court rejected the claimant’s arguments, stating that Article 6 and 8 require that a domestic court can review a UN derived sanctions listing to see if it is haphazard and SALMA provides for this. The ECHR, however, does not demand that a domestic court should be able to quash a UK sanction. Therefore, SALMA was compatible with the ECHR.

    Unfortunately, this decision does indicate a watering down of post-Brexit human rights protections and a strengthening of the UK’s position on sanctions.

    Council of the European Union listing

    There are two ways to challenge a designation at an EU level:

    • The designated person can submit a request to the Council to be removed from the list, or
    • He or she can apply to the General Court to have the decision regarding the act which imposed restrictive measures on them annulled.

    In European Commission v Kadi (Cases C-584/10 P, C-593/10 P and C-595/10 P) ECLI:EU:C:2013:518 (Kadi II), the European Court of Justice annulled the re-listing of the claimant on a UN designated list by the EU because there was insufficient reasons provided for his designation as an “associate” of Osama bin Laden and Al-Qaida. Furthermore, not enough evidence had been provided to enable the court to determine whether the reasons given for the claimant’s inclusion on the designated list could be corroborated.

    UK government listing

    A listed person can request that their inclusion on a sanctions list is reviewed by submitting a Sanctions Review Request Form, along with supporting evidence, to the Foreign, Commonwealth & Development Office (FDCO), which will review the request and provide a decision and the reasoning behind it. It is possible to bring a judicial review against the FDCO decision if the application to be removed from a designated list proves unsuccessful.

    Final words on sanctions

    Britain’s exit from the EU has made challenging sanctions more difficult on a practical level. This is because the European Court of Justice has provided a string of case law demonstrating that they can and will review sufficient evidence to support the reasons given by EU institutions for listing a person. Since 11 pm on 31st December 2020, UK citizens no longer have the right to challenge being included on the UN designated sanctions list in the European Court of Justice.

    Although R (Youssef) v Secretary of State for Foreign, Commonwealth and Development Affairs was not a positive decision in terms of the UK courts deciding to follow the European Court of Justice’s stance of annulling sanctions in certain circumstances, the fact is that given the political and economic impact sanctions have on people, organisations, and governments, more legal challenges can be expected in the near future, particularly concerning the recent spate of Russian sanctions. These future decisions will determine the UK courts’ post-Brexit direction on sanctions, commercial freedom, and human rights.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect sanctions in place at the time of writing, 26th April 2022. This article does not constitute legal advice. For further information, please contact our London office.

  • Are Cryptocurrency Assets a Form of Property?

    Are Cryptocurrency Assets a Form of Property?

    The past few years have seen a substantial development in the Cryptocurrencies sphere. An increase in technological and political advances has shifted Crypto into the mainstream. With this fast developing market, the law and regulators have been sluggish to figure out how best to deal with legislation, and how to keep cryptocurrency investors in a safe position.

    A case study: AA v Persons Unknown

    The landmark decision of AA v Persons Unknown [2019] EWHC 3556 (Comm), has recently shed some much needed light on the regulation of Crypto Assets.

    A Canadian insurance company became the victim of a cyber-attack in the landmark case of AA v Persons Unknown. The hacker infiltrated the company’s firewall, deployed malware, and encrypted its computer systems. A ransom note demanded 109.25 Bitcoins in exchange for decryption software to restore the systems.

    The ransom was paid into an account designated by the hacker. Fortunately, the company had insurance coverage for certain types of cyber-attacks. After the payment, the insurer began investigating the Bitcoin transaction and brought in a specialist firm to track cryptocurrency payments. This firm was able to trace the path of the transferred Bitcoins.

    In order to recover the lost Bitcoins from the hacker, a proprietary injunction was sought.

    The most important question which arose in relation to this proprietary injunction was whether or not the Bitcoins are property at all and can subsequently be the object of a proprietary injunction. As stated by the High Court, English law traditionally views property as being only of two kinds, either as things in possession or things in action.

    Therefore, there is a difficulty in treating crypto currencies and Bitcoins as a form of property as they are neither things in possession nor are they things in action. They are not things in possession because they are virtual, intangible and they cannot be possessed. In addition to this, they are not things in action as they do not embody any right capable of being enforced by action. The High Court however, refused to accept that English law recognizes no forms of property other than things in possession and things in action.

    The High Court further concluded an in-depth discussion into whether English law recognizes other forms of property by looking into the recent legal statement on Crypto assets and Smart contracts published by the UK Jurisdictional Task Force (“UKJT”). In this legal statement it was decided that “the fact that a crypto asset might not be a thing in action on the narrower definition of that term does not in itself mean that it cannot be treated as property”. Taking this into consideration, the High Court decided that crypto assets such as Bitcoin are property.

    In coming to this conclusion, the judge referred to Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth [1965] AC 1175. This definition stated that the four criteria for an object to be defined as property included being ‘definable, identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence’. The High Court came to the conclusion that crypto assets such as Bitcoin do actually meet this definition of property.

    In confirming that crypto assets such as Bitcoin are considered property, it was stated that they could be capable of being the subject of a proprietary injunction. The High Court therefore granted the injunction sought against the hackers.

    This decision was subsequently a welcomed clarification in defining crypto assets as property. Further, this decision provides increased assurance that English Courts are favorable to the idea that “established, tradeable cryptocurrencies can be treated as property”. We will await further clarity from the English Courts in determining whether cryptocurrency is recognized as property not just in the circumstances where a proprietary injunction is involved.

  • How Russian Sanctions May Affect Your Business

    How Russian Sanctions May Affect Your Business

    Note: The points in this article reflect sanctions in place at the time of writing, 12th April 2022. This article does not constitute legal advice. For further information, please contact our London office.

    We recently discussed the effectiveness of targeted sanctions when it comes to dealing with rogue states such as Russia and North Korea and argued that although sanctions provide the impression to voters that their government is taking affirmative action, there is little evidence they influence the inner circle of a country’s leadership. Regardless of their effectiveness, however, targeted sanctions have been used by the UK, EU, and US against Russian individuals and businesses in response to Russia’s invasion of Ukraine. Many companies have been caught up in the sanctions regime and/or want to launch new ventures in Russia. This article explains the type of sanctions in place and the risk assessments and due diligence organisations must apply before, during, and after doing business in Russia in order to protect their best interests. And although this article focuses on Russian sanctions, the information contained below applies to doing business in any sanctioned jurisdiction.

    To begin, let us look at what Russian sanctions may apply to your organisation.

    What is the scope of UK, EU, and Russian sanctions?

    UK sanctions

    UK sanctions apply to all British citizens, British overseas citizens, and any entity incorporated in the UK. They also cover any actions taken by someone in the UK (either wholly or partly) or in UK territorial waters.

    EU sanctions

    EU citizens, incorporated entities, anyone on board an aircraft or ship travelling within the jurisdiction of an EU Member State, and anyone conducting business wholly or partly within the EU is subject to EU sanctions.

    US sanctions

    Like US taxes, US sanctions can ensnare the unwary. Not only do US sanctions apply to US citizens and incorporated businesses, as well as anyone conducting business wholly or partly within US territory, under the Countering America’s Adversaries Through Sanctions Act (CAATSA) non-US citizens can also be caught by US sanctions.

    Given the wide catchment of UK, EU, and US sanctions, people and organisations doing or planning to do business in Russia and/or any other country where sanctions have been imposed need to undertake comprehensive due diligence and risk management to ensure they are fully compliant with any sanctions imposed. Non-compliance can lead to significant legal, financial, practical, and reputational implications for UK organisations. Below is a brief guide to ensuring you do not inadvertently breach not only the legal aspect of international sanctions but the spirit in which they have been applied, the latter being something that the public will neither forgive nor forget if your business is subjected to a ‘trial by social media’.

    Be mindful that the situation can change rapidly and without warning, therefore, it is vital to take experienced legal advice regarding the below guidelines.

    Check your commercial contracts

    If you have commercial contracts with people or organisations in a sanctioned country you must review the terms of the agreement to ensure the goods and services they cover do not fall within current sanctions. Never take the wording of sanctions at face value – the EU has sanctioned ‘luxury goods’ such as alcoholic spirits, sporting equipment, perfumes, handbags, and clothes. These items are defined as ‘luxury’ if their value exceeds €300, hardly an outrageous sum.

    You may wish to simply cancel any contracts that have connections with a sanctioned state, however, unless the terms of the contract allow for such a step, for example, there is a force majeure clause that permits termination in the case of sanctions, you will be in breach of contract.

    If one or more of your contracts have become uneconomical, untenable, or both, you may be able to rely on the doctrine of frustration. Frustration was defined by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC [1956] AC 696 (at 729) (emphasis added)

    “frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

    Generally speaking, the courts in England and Wales will ask the following questions to determine whether or not a contract has been frustrated:

    • Did the event occur after the contract was formed?
    • If so, does it strike at the heart of the contract and is it entirely beyond what was contemplated by the parties when the agreement was entered into?
    • Is either party at fault?
    • Does the frustrating event render further performance impossible, illegal, or transform performance into something radically different from that contemplated by the parties at the time of signing?

    Although the above questions provide a reliable guide to how the courts will evaluate whether or not the doctrine of frustration will apply, all cases will turn on their own facts.

    Undertake comprehensive due diligence and risk management exercises

    In circumstances where you or your organisation plan to launch a new venture into a territory subject to UK, EU, or US sanctions, a meticulous due diligence and risk management exercise must be completed. Factors to consider include:

    • The legal jurisdiction governing any agreements and disputes.
    • Payment terms such as late payments and letters of credit which may be considered loans and therefore prohibited by certain sanctions.
    • The ability to secure adequate insurance and onboard suppliers/distributors.
    • Including contractual terms to allow for a rapid exit, for example, a detailed force majeure clause and sanction-specific termination clauses.
    • Undertaking Know Your Customer/Business Partner checks to establish whether or not an entity is owned or controlled by a sanctioned person, or a designated person is effectively also sanctioned but does not appear on a sanctions’ list.

    Wrapping up

    Sanctions involve a complex web of domestic and international law, much of which is beyond the scope of this article. Therefore, it is imperative to check each transaction related to Russia or any other country subject to sanctions individually and seek legal advice as to you and/or your organisation’s legal position.

    Below are some websites you may find helpful:

    You can also contact the Export Support Service on 0300 303 8955.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Written by Waleed Tahirkheli

  • Are Targeted Sanctions Effective In Dealing With Rogue States?

    Are Targeted Sanctions Effective In Dealing With Rogue States?

    As the war in Ukraine continues, sanctions imposed by Western governments and the impact of hundreds of companies pulling out of the country are starting to negatively affect the daily life of the Russian people. Prices are increasing, shortages are being reported, and the rouble has plummeted.

    Never before has such a large, modern economy been cut off from most of the world so swiftly. Unfortunately, there is ample proof that state and even UN sanctions are not effective in coercing a government deemed to be breaking international law to change its behaviour. What sanctions are extremely good at achieving is punishing innocent civilians. The horror placed upon ordinary Iraqi people following crippling sanctions in response to Saddam Hussain’s invasion of Kuwait in 2003 led to sanctions being focused more on individuals and companies rather than the misbehaving state itself. These are known as smart or targeted sanctions and they are also being used by Western governments, including the UK, to punish Russia. Evidence shows, however, that targeted sanctions also achieve little in relation to dealing with rogue states. Worse still, innocent people can become caught up in freezing orders and other sanction tactics whilst the individuals targeted often use their wealth and power to avoid most of the negative consequences.

    Before looking at the details of the sanctions imposed by the British Government on Russia, it is useful to define what sanctions actually are.

    What are sanctions?

    Sanctions are a range of measures put in place by individual governments, regional groups (for example the European Union or the African Union) or the United Nations to achieve one or more of the following:

    • Prevent escalation of or settle conflicts.
    • Curtail nuclear proliferation.
    • Deal with terrorism and human rights violations.

    Types of sanctions include:

    • Economic – impose commercial and financial penalties, for example levying import duties and/or blocking exports of certain goods.
    • Diplomatic – reducing or recalling diplomats or cancelling high-profile international meetings.
    • Sport – preventing the sanctioned country’s athletes from competing in international events.
    • Targeted/smart sanctions – imposes travel bans and asset freezing orders on individuals, companies, or other entities such as terrorist organisations.
    • Military sanctions – these are used as a last resort and can involve targeted military strikes and arms embargoes.

    Russians affected by UK sanctions following the invasion of Ukraine

    The UK has long been criticised for turning a blind eye to international money laundering within its territories. Many Russian oligarchs have invested heavily in UK luxury homes, businesses, and even football clubs. Following the invasion of Ukraine, the UK, alongside the EU and US, imposed sanctions on hundreds of members of the Russian regime, including wealthy Russian oligarchs such as Chelsea FC owner Roman Abramovich and ex-Arsenal shareholder, Alisher Usmanov as well as others who are considered to be close to the Kremlin, for example, former Russian president Dmitry Medvedev and Defence Minister Sergei Shoigu, plus a further 386 members of the Russian parliament.

    The problem with imposing targeted sanctions on Russian oligarchs

    Countries such as the US have had sanctions in place against many Russian billionaires since the annexation of Crimea in 2014. These appeared to do nothing to deter President Vladimir Putin from a full-scale invasion of Ukraine eight years later. This may be because despite being once close to the Kremlin, most of the recognised oligarchs now seem to have little influence, or even contact with President Putin and his inner circle.

    In 2000, at a meeting with 21 business tycoons, President Putin made himself abundantly clear regarding his attitude to the oligarchs – they could remain in business but they were to stay out of politics. And he backed this up with action – Mikhail Khodorkovsky, once Russia’s richest man as head of oil giant Yukos and a fierce critic of the President, spent 10 years in prison for tax evasion and theft after funding opposition parties.

    With Mr Khodorkovsky’s fate still fresh in their minds, almost all oligarchs now stay well clear of politics. Although some have condemned the war, none have directly criticised President Putin. Mikhail Fridman told Bloomberg that “to say anything to Putin against the war, for anybody, would be kind of suicide.”

    It seems, therefore, that although imposing sanctions on the business and personal interests of oligarchs may appease the public by giving the impression that those who made billions out of the collapse of the USSR are finally being penalised, in reality, they no longer have any ability to influence the Kremlin’s actions. And even if they did, a 2019 paper concerning the effectiveness of targeted business sanctions concluded:

    “Through empirical analysis, significant evidence was found in support of the hypothesis that targeting military interests will result in more successful outcomes than targeting other interest groups or comprehensive sanctions. Evidence regarding the targeting of business interests presented a far less compelling case of this line of sanctioning’s efficacy relative to comprehensive sanctions.”

    Final words

    Although more research is required to judge the effectiveness of smart sanctions, the initial evidence does not appear promising. Furthermore, smart sanctions are even less likely to achieve the aim of the government or group that imposes them if they are not targeting people and/or business interests that can actually influence the rogue state’s leadership. I will leave the final word to Mohamed ElBaradei, an Egyptian law scholar and diplomat, former Director-General of the International Atomic Energy Agency, and Nobel Peace Prize recipient:

    “People talk about smart sanctions and crippling sanctions. I’ve never seen smart sanctions, and crippling sanctions cripple everyone, including innocent civilians, and make the government more popular.”

    Written by Waleed Tahirkheli

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

  • EncroChat Hack: What next?

    EncroChat Hack: What next?

    Last week, the NCA announced that over 800 people were arrested across Europe and the world after French and Dutch authorities intercepted messages on “EncroChat“, an encrypted messaging platform. The National Crime Agency (“NCA“) have been leading efforts in the UK, hailing “Operation Venetic” as  the broadest and deepest ever operation into serious organised crime.

    What are Encrophones?

    Encrypted phones – or “Encrophones” – are mobile devices that use sophisticated algorithms to prevent messages or phone calls being read or listened in to if they are intercepted. Encrophones offer high levels of privacy.

    Are Encrophones Illegal?

    To be clear; Encrophones are not illegal, and being in possession of an Encrophone is not a criminal offence.

    What is EncroChat?

    EncroChat is a company that sold custom-made, encrypted handsets. These phones have private messaging applications and are capable of making calls that are not traceable using conventional ‘Cell-Site’ technology (to locate the handset). These phones had their GPS, camera and microphone removed and had the ability to have all its data deleted by entering an emergency PIN-code. EncroChat operated a subscription service which could cost their users as much as £1,600 per month and are popular with high net worth individuals and celebrities.

    The Police Operation

    The EncroChat system was hosted in France. French and Dutch authorities launched a joint-operation to successfully infiltrate the system. They collected intelligence on the users of EncroChat, and discovered that many users appeared to be organised criminals; brazenly engaging in criminal enterprise from the transportation and sale of drugs to ordering killings and co-coordinating violent criminal acts.

    Reports indicate that the police had been using the intelligence harvested from their surveillance of the EncroChat system to apprehend organised criminals, using the intercepted messages to execute targeted raids and arrests while taking great care to not give away the source of their information. This all came to an end on the 13th June 2020, however, when the operators of the EncroChat platform discovered the hack, and sent a warning to all their subscribers that their privacy may have been compromised.

    European law enforcement agencies have seized a large number of Encrophones, and have made some 800 or so arrests – including arrests of corrupt law enforcement officers. It is estimated that £54million in cash has been seized as the proceeds of crime as well as 77 firearms and 1.5 tonnes of cocaine.

    Read more about Encrochat and the investigation process on our article published on Al Jazeera: The EncroChat police hacking sets a dangerous precedent

    How Can We Assist?

    Our fraud and economic crime solicitors are experts in dealing with complex criminal investigations. We have extensive experience of successfully defending individuals and organisations accused of all manner of criminal offences, and work with some of the world’s leading digital forensic experts and barristers. We are currently exploring arguments about the way in which these police operations have been conducted and the admissibility of any evidence obtained.

    If any of the issues raised in this article are relevant to you, or you have any questions about the use of an Encrophone, you should seek advice from an experienced team of solicitors immediately: Mohammed Sarwar Khan and Abbas Nawrozzadeh. Seeking advice early can make all the difference, and may circumvent the need for an arrest.

    If you are arrested, what you say or do at the interview can determine the outcome of your case. Always exercise your right to have legal representation.