Business Day Law & Tax (Mar 2023)

BUSINESS LAW &TAX

Employers’ duties during lockdowns and blackouts

Brian Patterson & Amy Pawson ENSafrica

Heavy restrictions placedon business operations in SA under the Disaster Management Act (DMA) during the Covid-19 pandemic meantmany employers were unable towork and consequently faced challenges inmaking payments to their employees in terms of their employment contracts or collective agreements.

Courtsare nowproviding more clarityon what employer obligations were when facedwith supervening impossibilityof performance during theinitial period of the Covid-19 pandemic. In therecent decisionin

Glencarol (Pty) Ltd v National Bargaining Council for the Clothing Manufacturing Industry (NorthernChamber) and Another, VanNiekerk J dealt with an application to review an arbitration award

DIFFICULTY OR OPERATIONAL CHALLENGES IN RUNNING A BUSINESS DOES NOT RESULT IN LEGAL IMPOSSIBILITY OF PERFORMANCE

wherethe arbitratorhad uphelda bargainingcouncil’ s compliance order compelling theGlencarol (Pty)Ltd(the employer) to complywith a

collective agreement relating to thepayment ofannual bonuses and leave pay.

During the initialperiod of the nationallockdown in 2020, theDMA Regulations prohibited the employer from conducting businessand its employees wereprohibited from attending work.

Subsequently, whencalculating itsemployees’ annualleave payandannual bonuses entitlementin terms of a bargaining council collective agreement,the employer excludedthis periodof the “hard lockdown” from its calculation.

The bargaining council did notagree withthisapproach. It issued a compliance order instructing theemployer to comply withthe clauses relatingto thepaymentof annual leave payand bonus-

HARD TIMES

es. Thearbitrator foundthat the employerhad contravened certain clauses of the collective agreement because, among other things:

● The mere factthat it became difficultor expensive to dischargeobligations did not meanthat performance had become impossible;

● Nothing indicatedthat all players in the industry were unable orcould notcomply with thecollective agreement; and

● If performancewas objectively impossible,the parties to thebargaining council could havesuspended the collective agreement s provi-

sion, but did not do so.

On review inthe Labour Court,Van NiekerkJacceptedthat, duringthe periodof thehard lockdown,boththe employer andthe employees could notperform theirobligations in termsof the emEMPLOYEES COULD NOT LAWFULLY TENDER THEIR SERVICES AND, AS A RESULT, THE EMPLOYER WAS NOT REQUIRED TO PAY THEM

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ployment contracts and that it wouldhave beenunlawfulto do so. In effect,this meant the employees couldnot lawfully tender their services and, as a result, the employerwas not required to pay them. The court furtheraccepted the periodduring whichthecontract was, in effect, suspendeddid nothaveto betaken into accountwhen calculating leave payand annual bonuses.

Inthe lightof theabove, the arbitrator saward was found to be incorrect and was set aside.

• Courts provide more clarity on what companies have to do when their businesses cannot operate

Employers’ duties during lockdowns and blackouts

CONTINUED FROM PAGE 1

WHEN IT’S UNLAWFUL TO WORK

Itissubmitted thatthecourt’ s approach was correct in law.

In terms ofSouth African common law contractual provisions, theprinciple of impossibility ofperformance on the part of the employer is, in effect, limited.This is because, ifemployees tender their services, anemployer is obliged to pay the employee’ s remuneration, notwithstanding that the employer cannot provide them withwork to do due tosome external factor or circumstance.

Impossibility on the part of the employerwould only arise ifthe employerwas objectively unableto lawfully provide work.However, in this case, due to the operation of theDMA Regulations, employees werelegally prohibited fromworking and thus tendering their services.

Accordingly, the employer was notlawfully permittedto accept such an unlawful tender and had no legal obligation to pay the employee. This decision by Van Niekerk J accords with the advice we provided toclients atthe time.

NEVERTHELESS, THE ISSUE REMAINS RELEVANT DURING THE ERA OF LOAD-SHEDDING

The above principle only applies during the hard lockdown period whenperformancewas legallyimpossible. Thereafter, most employees werethen entitledto tendertheir services,and arguably,if theydidtender suchservices, anemployer would have beenrequired to pay themeven ifthat employerdid nothavework for the employees to do. Difficultyor operationalchallenges in running a business does not result in legal impossibility of performance.

Nevertheless, theissue remainsrelevant duringthe eraof load-shedding.If employeestender theirservicesto anemployer, butthe provisionof workbythe employer is not possible due to load-shedding, is there an obligation to pay them?

There is no doubt that this issuewill becanvassedin future decisions.

LATERAL THINKING

Budget questions remain

Evan Pickworth Business Day Law & Tax Editor

SA’snational 2022/ 2023 budget did not rocktoo many boats, tickedmany boxes ontax relief and focusedon gettingrunaway debt under control.

Thejury is,however,well andtruly outon whetherit goes far enoughin ensuring Eskom andthe numerous government departments involved inthe energymix cannavigate SAout ofthe electricity crisis.Taking on Eskom debt withfairly minimal restrictionsmay fall woefully short of what is needed tokickstart change on the ground.

The debt-reliefarrangementcovers R254bnor60% of Eskom’s debtand will be disbursed overthe nextthree years. Someof theconditions of the debt relief restricts Eskom’s capitalexpenditure to transmissionand distributionand placesamoratorium on new borrowing.

Instead, Eskom, the National Treasuryand the department ofpublic enter-

prises willdesign amechanism toallow “extensive private participation” in the building ofnew transmission infrastructure. Scantdetails on thatparticipation were available,butit seemsastep inthe rightdirection iftaken seriously.

WHILE THE ESKOM DEBT RELIEF PACKAGE IS WELCOME, THE CONDITIONS COULD HAVE BEEN MORE DEMANDING

Due to theEskom debt relief, government debt will stabilise at a higher level of 73.6% of GDPin 2025/2026. This is, however, three years later thananticipated inthe 2022 medium-termbudget policy statement.

Partner atPKF Octagon,

Ziyaad Moosa, says: “In short, theyare takingdebtoff Eskom’s balance sheet and this impacts our country’ s ratio ofgovernment debtto GDP. Thechallenge nowis whether there is enough politicalwill totake someof the hard decisionsthat are needed to fixthe power utility. Together with this, we need a new CEO at Eskom to drive the business forward. It will need to be someone with enough clout to get the wheels moving,” says Moosa. Questions over necessary changes to the workforce, managing old power stations and government interference remain unanswered.

Johann Els,chief economistat OldMutualInvestment Group,says whilethe Eskom debtrelief packageis welcome, the conditions could have been more demanding. “The conditions are a littledisappointing as one would have expected there to becertain targets to be met beforepayments are made; however, with that said, the mentioned conditions are not inadequate.”

On theEskom debt takeover anddebt ratio,Els says the planto phase the Eskom debt takeover seems credible and comesat the right time. “Despite the Eskom debt transfer, the debt ratio still substantially improved from the levels recorded in October 2020,” hesays, butcautions that “ we are not out of the woods yet” There is along, hard road

ahead before we reach a situationwhere wecould beratedas investmentgradeby ratings agencies,” he added.

AJM Tax founder and directorDr AlbertusMarais feels thebudget wasa relativelyunexciting event.But the fact that it is predictable is, after all, good for business.

Els says markets would have liked theemphasis on fiscalconsolidation, theprimarysurplus, theEskom debt deal, thetax giveaways forconsumers, incentivesfor renewable energy and no fuel levy increase.

Onthefuel levy,Inote withinterest commentsby Redefine PropertiesCEO AndrewKönig thatthere shouldhave beenconsideration for tax relief on diesel consumed during back-up power generation.

Why pay roughlya quarter of the diesel bill to the state when these go to the general coffersand roadaccident fund? This is not going back tosupport thoseassuming the role of the state during the energycrisis. Aslandlords and tenants who bear a large portion of thiscost, we are providinga necessaryservice,being electricity,and then paying government a tax through the costof diesel. That is not equitable and these taxes shouldnot be levied onus theway they are, he said in a note.

I couldn t agree more. Other sectorsdo getrebates for thisexpense andit would becompletely fairtoextend this to more sectors paying millionsin back-updiesel generation to keep the lights onandthe entireretailsector afloat.Ultimately alarge portionofthe costispassed on to tenants, who would in turnneedto passthatcoston to customers.

That is not a good equation aseveryone, exceptthestate whichfacilitated theenergy crisis, suffers. Welive in hope that such anincentive could

becomea reality,perhapsin the mid-termbudget laterin the year. Unlikely,of course, but it is a wonderful point.

Els says markets will be concernedabout thesmall increase in the wage bill budget (only+1.6%). Therewas also nothing in budget for continuationof theCovid grantbeyond March2024 (but there are large contingency andunallocated reserves included in future budgets).

Marais says the Treasury is clearly intent on decreasing its relianceon debt,with debt service costs forthe present financialyear budgetedat about R340.5bn, up 13% comparedto thepreviousyear andmostly attributableto increasedrepayment ofborrowings whichgovernment canall themore afford.The governmentis clearlytaking itsdebt consolidationefforts seriously. That being so, debt servicecosts andsocial spending still together account for an enormous 75% of our national budget.

Tax revenues are also expected to bebolstered at higherthan inflationaryrates, with annual increases of 6.5% expected for the next three years. This canno doubt be attributedto theeverincreasing compliancedividend and aresilient and growing tax base.

The budget is, however, alsointeresting forwhatit does not say, according to Marais. Absent aredetails of where the public sector wage bill is expectedto land, for instance,aswell asanyindicationsof furthertangible exchange control reform.

• It’s unclear whether it goes far enough in ensuring SA can survive the electricity crisis

BUSINESS LAW & TAX

Severance pay in the spotlight

Jacques van Wyk & Michiel Heyns

Werksmans Attorneys

Section 41(4)of the Basic Conditionsof Employment Act

75 of1997 (the BCEA) relievesan employerof theduty topay severance payin circumstances wherethe employee whois dismissedforoperational requirements “ unreasonablyrefuses toacceptthe employer’s offerof alternative employmentwith that employer orany other employer”

TheLabour Court(LC) recently revisited the application of section41(4) in the case ofServest Landscaping Turf Maintenance (Pty) Ltd v SACCAWY oboThisani & Others (2022)C464/2019 and re-affirmedthe principle that the requirements of section 41(4) are satisfied if retrenchees areoffered suitable alternative employment with a new employer as a result ofthe effortsof the retrenching employer.

In thecase ofIrvin &

Johnson Ltdv Commission for Conciliation,Mediation & Arbitration &others (2006)

27 ILJ 935 (LAC), the Labour Appeal Courtheld that “the purposeof severancepayin our law is not necessarily to tide the employeeover while he is lookingfor another job. If that was the purpose, an employee who immediately walks intoanother and sometimes evenbetter pay-

The LAC set out four instances when severance pay is payable pursuant to section 41:

● If the employee unreasonably refuses an offer of alternative employment, then no severance pay is payable;

● If the employee reasonably refuses such alternative employment in which event he or she is entitled to payment of severance pay;

● If the employee accepts the alternative employmentin which event heor she also forfeits theright toseverance pay; and

ing job afterhis dismissal wouldnot beentitled toseverance pay because he would have noneed forit.” The LAC held that section 41(4) of the BCEA ultimately rewards an employer for offering or securing alternative employment for an employee.

● If anoffer ofalternative employment is made to the employee, but theoffer is not made by his or her employer or through the efforts of his or her employer then he/she would be entitledto severancepay, evenif theemployee turns it down.

APPLICATION

In the Servestcase, the Commission forConciliation Mediation andArbitration (CCMA), found that Servest hadfailedto provethatthe individual employees had

obtained alternativeemployment with Bidvest through Servest’s efforts.

Instead, theCCMA found that, at best, Servest played a part in facilitating the employment of the 22 employees with Bidvest but didnot securesuchemployment for the employees.

The CCMAconcluded that it was notat the instance of Servest that the retrenched employees foundalternative employment with Bidvest.

Servest subsequently referred the award for review

LEGAL SCOOP

to the Labour Court.

In considering,among others, Irvin& Johnsonand Fidelity SupercareCleaning (as outlinedabove), theLC foundthat thearbitratorhad made an errorof law which ledher to “disregard orminimise the significance of material evidence”

The evidence presented, which had been left uncontested, indicated that the relevant branch manager of Servest initiated meetings with Bidvest, that Servest kept a “close eye” on Bidvest’ s

recruitment ofits staffand made its own premises, facilities and resources available toensure thatno-onewould beleftunemployed orlosea day’s work.

The LC found that the CCMAhad madean errorof law infinding thatanything less thana bindingundertaking obtainedby Servestfrom Bidvest was sufficient to show that Servest secured alternative employment for the 22 employees.

The LC set aside the finding of the CCMA with a finding thatall ofthe employees who were employedby Bidvest through Servest’s efforts, were not entitled to severance pay assection 41(4) of the BCEA applied.

Anemployee willnotbe entitledto severancepayif the employeeis employedby another employer and the retrenching employercan demonstrate that it secured the alternative employment through its efforts.

At aminimum, a retrenching employer must beableto demonstratethatit played an instrumental role in securing alternative employmentfor anemployeewith anotheremployer ifitseeks torely onsection 41(4)of the BCEA.

Top court clarifies fuel retailer and Engen lease

Ian Jacobsberg

Fluxmans

On February 1 2023, the Constitutional Court handed down a judgment that has a bearing on contracts involving wholesale suppliers of petroleum products, and the retailers to whom they supply them. It could also affect other parties dealing with fuel wholesalers and retailers.

The case (Rissik Street One Stop CC t/a Rissik Street Engen and Another v Engen Petroleum Ltd [2023] ZACC 4) arose from an operating lease between Rissik Street One Stop CC (the retailer) and Engen. The operating lease contained a clause in terms of which, if Engen did not intend to renew it, it would give the retailer at least 12 months notice, to give the retailer an opportunity to sell its business before the operating lease expired and so realise the entrenched value of the business.

The operating lease contained two further clauses which were apparently in conflict, one providing that Engen would

not unreasonably withhold consent to any sale the retailer entered into, and the other providing that it had an absolute discretion whether or not to approve a sale or not.

Engen gave notice of its intention not to renew the operating lease but then refused to consent to a sale concluded by the retailer, and the retailer challenged Engen’s decision on the basis that it was unreasonable.

The retailer referred the dispute to the Controller of Petroleum Products (controller) in terms of section 12B of the Petroleum Products Act, 120 of 1977 (PPA). Section 12B was enacted with a view to levelling the often uneven contractual playing field between fuel wholesalers and retailers, by providing that the controller may, on request by a licensed retailer

alleging an unfair or unreasonable contractual practice by a licensed wholesaler, or vice versa, require the parties to refer the matter to arbitration.

If the arbitrator is of the opinion that the alleged contractual practices concerned are unfair or unreasonable, he or she must make such award as he or she deems necessary to correct the situation. The arbitrator has the power to override the express words of a contract.

During the time the arbitration was pending, the retailer s operating lease expired and Engen demanded that the retailer vacate the site. The retailer refused to do so, arguing that it was entitled to remain in occupation while it attempted to sell its business, in accordance with the operating lease. Engen applied to the high court for an order evicting the retailer as its lease had expired. The retailer in turn applied for an order that Engen s eviction application was to be stayed pending the outcome of the arbitration. The high court granted the retailer s application. The high court s

order was set aside by the Supreme Court of Appeal (SCA), and the retailer appealed the SCA s decision to the Constitutional Court.

The Constitutional Court upheld the retailer s appeal and ordered that Engen s application to evict the retailer, on account of its operating lease having terminated, was to be stayed pending the decision of the arbitrator as to whether Engen s refusal to approve the purchaser introduced by the retailer was an unfair or unreasonable contractual practice . In the interim, Engen was obliged to allow the retailer to continue to conduct its business according to the terms of the operating lease. The Constitutional Court held that the purpose for which the 12months notice requirement was inserted in the operating lease in the first place was to allow the retailer time to sell its business and realise the entrenched value (which the retailer estimated was R6m-R8m). If the retailer was to be evicted, the business would no longer be a going concern and its value would be lost.

The judgment confirmed:

● 1. The express terms of an agreement between a fuel wholesaler and retailer may be overridden if an arbitrator appointed in terms of the PPA considers them to be unfair or unreasonable; and

● 2. If the implementation of the express terms of an agreement between a wholesaler and retailer would render the outcome of a decision by an arbitrator ineffective, the implementation of the terms may be delayed pending the arbitrator s decision. This would include action to terminate the agreement and the agreement can therefore effectively be extended while an arbitration in terms of section 12B of the Petroleum Products Act is pending.

Section 12B of the PPA only deals with contractual practices between licensed fuel retailers and wholesalers. It does not deal with contractual

relationships between wholesalers and retailers and third parties (such as franchisors and suppliers of other businesses carried on by a retailer on the site of a retail fuel outlet). Those agreements will continue to be in effect and enforceable in accordance with their terms, notwithstanding the commencement or outcome of any arbitration proceedings in terms of the PPA. However, the franchise and supply agreements relating to other businesses that may be carried on the site are often linked to the existence and validity of the agreement between the wholesaler and retailer, and the wholesaler may sometimes even be a party to those agreements.

For that reason, a contractual practice by a wholesaler of petroleum products in relation to a retailer may impact the interests of the franchisor or other party to such an agreement and that party will need to consider the impact that the initiation and the outcome of an arbitration in terms of the PPA may have on their own contracts and contractual relationships.

IF THE RETAILER WAS TO BE EVICTED, THE BUSINESS WOULD NO LONGER BE A GOING CONCERN

• Labour Court sets aside CCMA finding over Servest employees who were employed by Bidvest

THE LABOUR APPEAL COURT SET OUT FOUR INSTANCES WHEN SEVERANCE PAY IS PAYABLE PURSUANT TO SECTION 41

THE INS AND OUTS

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BUSINESS LAW & TAX

New SEC rule has effect on dual listings

Lizle Louw, Jesse Watson & Carine Murphy Webber Wentzel

Anew USSecurities Exchange Act ruletakes effect on January 27 2024 and affectsUS-listed private issuers anddual-listed companies.

The ruleprovides forthe return ofcompensation, paid erroneously to executive officers as a result of accounting restatements, tothe issuer and itsshareholders, regardless of the faultof the executive officer.

TheUS Securitiesand Exchange Commission (SEC) recently introduceda new Rule 10D-1 underthe Securities Exchange Act of 1934 (Rule 10D-1).

Thenew ruledirectsUS exchanges toestablish listing rulesthat wouldrequirelistedcompanies toadoptclawback policies for the recovery of incentive-basedcompen-

sation awardedto executive officers whenthe financial information onwhich that compensation wasbased was materially misreported.

In this article, we provide SAprivate issuersthatare US-listed witha high-level understanding ofthe new Rule10D-1 anditsimplications for their businesses. It is essential for private issuers to

RULE REQUIREMENTS

and officers’ insurance arrangements.That iseasier said thandone, asit will probablyentail thefollowing steps:

● Review where executive officers are based and consider what steps may be necessaryto ensureenforcement of clawbackis possible (eg consider whether scheme rulesrequire consentfrom participants where amendmentsaffect rightsofparticipantsandwhat isincludedin the participants’ terms and conditions of employment);

suchpolicies. Onedifference is thatin the USclawback is mandatoryonce atrigger event has occurred. This is notthe casein SA,where itis typically discretionary.

Under Rule 10D-1, clawback mustbe triggeredwhen anissueris requiredtopreparean accountingrestatement thatcorrects amaterial error inpreviously-issued financialstatements (BigR restatement),on theone hand, or that would result in a materialmisstatement ifthe errorwas correctedinthe currentperiod orthatwould result ina materialmisstatement if it were left uncorrected in thecurrent period (little r restatement), on the other hand.

authorisedbody directsthe issuer to preparea restatement.

The new Rule10D-1 will apply to anycurrent or former executiveofficer, regardlessof misconduct,for compensation received in that capacity.

The definition of “ executive officer” will depend on the issuer,but it islikely to overlapwith the “senior management” group identified in annual reports.

full fiscal years pre-trigger) in excess of the amount that wouldhave beenreceived basedon therestatement, calculatedwithout regardto taxes paid.

SA private issuers with US listings thatfail tocomply withthe newRule 10D-1risk adverse disclosures, reputationalharm, andeven delisting. Issuerindemnification or insurance will not curb liability.

● Review documentation and identify necessary amendments, particularly to assesswhether thecurrent malus and clawbackpolicy is sufficient to satisfythe new rules.

● We believethat suchpolicies drafted in the SA context will requiresignificant amendment due to the differencesin theprevailing regimesin eachjurisdiction. Updates would thenflow to anyincentive planrules, bonusschemes, ordirector remuneration policies which may, in turn, require regulatory approval, forexample, in termsofSchedule 14tothe JSE’s listings requirements.

understandthat theircurrent malusand clawbackpolicies will probably not be sufficient to meet the new SEC requirements, due to the substantive differencesbetween theUS andSA regimesgoverning

A trigger event is the earlierof (i)the dateon whichthe authorised body/person at the issuer concludes,or reasonablyshould haveconcluded, thatthe issueris required to prepare a restatementor(ii) thedateacourt, regulator,or otherlegally

The newrule appliesto incentive-based compensation, which is any compensation that is granted, earned or vestedbased whollyorin parton theattainment ofany financial reporting measure.

The amount subject to clawback isthe amountof incentive-based compensationreceived (duringthree

CONSUMER BILLS

The US listing requirementsthat flowfromRule 10D-1will becomeeffective bynolater thanJanuary27 2024.

To ensurecompliance with the newRule 10D-1, SA private issuers will need to adoptan amendedclawback policy by the end of 2023 and reviewall theirexecutive remuneration anddirectors

● Remuneration Committee (RemCo)terms ofreference, ifany,may needtobeupdatedto reflecttheRemCo’ s obligationto applyclawback andmaintain arecordof clawback obligations.

With less thana year to assessimpacted policiesand agreementsfrom acorporate governance andemployment perspective, US-listedSA issuerswould bewell advisedto takeaction promptlyby briefingtheir stakeholders and identifying the impacted documents.

If you see 25 donkeys, just turn the other cheek

The origins of a claim for an infringement of personal rights where there is no physical injury dates back to the original Roman Twelve Tables of about 450 BCE.

It was a claim for injuria and, at the time, damages could be claimed for a slap in the face. Originally, the penalty for this injuria was 25 asses. That may have been a large penalty in 450 BCE but Aulus Gellius (who died in 180 AD) commented that, by then, it was hardly an amount to discourage people from injurious behaviour. He mentions a wealthy man who amused himself by slapping the faces of strangers and having his closely following slave presenting the surprised victim with 25 asses.

Actions for injuria are most often encountered nowadays in defamation suits. Someone whose reputation has been harmed

PATRICK BRACHER

can sue for general damages for hurt feelings, which is solace in the form of money.

It is restorative in that it recognises the harm done and requires money to be paid; but is in no sense compensatory.

It is the best a court can do to recognise the harm.

General damages, in the words of Roman law, achieve honourable amends rather than profitable amends. It is therefore a pity we have not embraced the right suggested in a 2011 Constitutional Court judgment to be able sue for a public apology where that is the most effective way of

restoring dignity. Currently, genuine contrition, an immediate public apology and retraction may allow the wronged party to reduced damages. It is not a defence in itself.

In November 2022 the Constitutional Court, deciding an issue debated by lawyers for generations, found that a defamed trading corporation may sue for general damages to protect its common law right to reputation. Many have argued up to now that a corporation, unlike a natural person, does not have hurt feelings. Because general damages are restorative and not punitive, a trading corporation may sue for general damages for an attack on its valued public reputation.

The judgment has implications for a corporation embarking on a SLAPP suit, namely a strategic lawsuit against

public participation, intended to discourage criticism about an issue of public concern.

The principle was decided in relation to three defamation actions brought by a mining corporation against a number of environmentalists who allegedly defamed the corporation. The court commented that large corporations play a vital role in communities and in the affairs of the economy and politics. But freedom of expression, including the freedom exercised by environmental activists, also has an important role to play in the health of the nation.

The Constitutional Court judgment did not look at the merits of the case before it. It was deciding the principle. This is no suggestion therefore that this action is a SLAPP suit. Whether it is or not, it is not important. What is important is that the court qualified a trading

corporation s right to sue for damages in an important respect, because of the chilling effect on free speech such an action may have.

The corporation s right to sue to protect its reputation is not sourced in the constitution, whereas freedom of expression is said to be the life blood of a vibrant democracy . Trading corporations will not be given an automatic right to general damages where the criticism is part of public discourse about matters that affect all or many of us, and are of grave public concern,

THE COURT SAID LARGE CORPORATIONS PLAY A VITAL ROLE IN COMMUNITIES AND IN THE AFFAIRS OF THE ECONOMY AND POLITICS

such as damage to the environment.

Where the defamatory matters form part of that public discourse, the trading corporation may not be awarded general damages. This will have, and was no doubt intended to have, a cooling effect on the litigious enthusiasm of corporations who are criticised when engaging in matters of public concern.

While this is a welcome restraint on defamation actions by trading corporations, it does make it difficult to decide in advance whether the courts discretion will be exercised one way or another. From now on, before corporations look for 25 asses for a slap in the face, they will have to decide whether they deserve a public slap or not.

● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

• US-listed firms must adopt clawback policies to recover executive incentives awarded erroneously

ONE DIFFERENCE IS THAT IN THE US CLAWBACK IS MANDATORY ONCE A TRIGGER EVENT HAS OCCURRED

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SA has work cut out getting off greylist

•

Webber Wentzel Finance Team

SA’s greylisting by the Financial Action Task Force (FATF) hassignificant implications for itseconomic growthand global competitiveness,but moves arealready being taken to satisfy the FATF.

Themain implicationof greylisting is that members of the internationalcommunity are “warned” that conducting business withthe impugned country couldfacilitate terrorism financingand money laundering.

In April2022, theInvestigating Directorate(ID) was established within the National Prosecuting Authority toprosecute individuals and entitiesthat were involved instate capture. Besides, SAsubmitted several reports tothe FATF, prosecuted severalmoney laundering offendersand utilised extraditions toget fugitive offenders. TheNational Treasury alsomoved quicklyto enact necessary legislation.

OnDecember 222022, the GeneralLaws (Anti-Money Launderingand Combating Terrorism Financing)

Amendment Act commenced after being signedby the president. Theact amends five piecesof legislation including the:1) Companies Act, 2008; 2) Financial Intelligence Centre Act; 3) Financial

Sector RegulationAct, 2017; 4) Nonprofit Organisations Act, 1997; and 5) Trust Property Control Act, 1988.

OnDecember 232023, the Protectionof Constitutional Democracy Against Terrorist andRelated Activities AmendmentAct commenced after beingsigned by the president.This act expands the definition of terrorist activities;provides for crimes relatedto terrorist training,the joiningofterrorist organisations, and the possession anddistribution of

GREYLISTING WILL DISCOURAGE FDI IN SA AND REDUCE CAPITAL INFLOWS. IT WILL RAISE THE COST OF DOING BUSINESS IN SA

publications withterrorismrelated content.

In February2023, SA made a high-level political commitment to work with the FATF and Eastern and Southern Africa AntiMoney Laundering Group to strengthen the effectiveness of its anti-money laundering and counter-terroristfinancing (AML/CFT) regime. Since theadoption oftheMutual Evaluation Report (MER) in June2021, SAhasmade

progress on manyof the MER’s recommended actions to improve its system, including bydeveloping AML/CFT policies to address higher risks and amending the legalframework forTF and TFS, among others.

The implications of greylisting for SAare twofold: reputational and economic. SA now has a negative reputation inthe globaleconomy.Itmay alsobedowngraded by credit rating agencies, which wouldaffect the country’s ability to borrow on the global capital markets.

The economicconsequences of greylisting are:

● Less capital flows into SA: According to a report by the International Monetary Fund (IMF),greylisting leadstoa significant decrease in capital inflows. For vulnerable countries, this could result in a balance of payments crisis. This is because greylisting entails thatall transactionsofSouth African companies and individuals will beseen as highrisk transactions, resulting in complicated compliance and administrative duties, and likely disincentivisinginvestment into and trade with SA.

● Economic penalties might beimposed onSA: FATF member states and other bodies might impose economic penalties and similar measures against SA. International finance flows to and from SA will entail higher

compliance obligationsand transaction costs.

Regulators in theUS, EU, andthe UKmightplace restrictions on their banks regarding transactingwith South African banks. Some international financial institutions have policies that prevent them fromdoing business with greylisted countries orat least,limit the scope of business that can be conducted. Suchrestrictions will further impede business and foreign investment.

● Less foreign direct investment (FDI): Greylisting will discourage FDI in SA and reduce capital inflows. It will raisethe costof doingbusinessin SA,makingforeign investors reluctant to invest in the economy. This is because globalcounterparts will have to undertake increased duediligence when dealingwith SAentities.As transactioncostsrise, there isa disincentiveto do businesswith firms. SA will beviewed asahigh-risk jurisdiction for business, so some foreign investors might take out their investments.

● Decrease in SA’s external reserves: If therearelower capital inflows and FDI into SA, this could reduce external reservesas therewill beless tax revenue.

● Difficulty obtaining financingon theinternational market: Given the implications of greylisting, SouthAfrican companieswill find it harder to obtain financingfrom foreignlenderson the international capital markets,and frommulti-laterallenders suchasthe World Bank.

● Decreased competitiveness of South African companies in theglobal economy: South Africancompanies, due toenhanced monitoring,will facemore requirements to prove sources of funding, leading to highertransaction costsand delayed execution of transactions.This willultimately harmthe competitivenessof SouthAfrican companiesand SAasa wholeintheinternational market.

Financial institutionsthat relyheavilyon globaltradein their treasury departments willbe heavilyimpacted.

COMPANIES WILL FIND IT HARDER TO OBTAIN FINANCING FROM FOREIGN LENDERS ON THE INTERNATIONAL CAPITAL MARKETS

Tradingoffshore willcome withhigher duediligence hoops to jumpthrough and morered tape.Tradingrevenue is thereforegoing to decline.The SouthAfrican insuranceindustry willbe impacted.

● Climate adaptation will be impacted: SA urgently needs to adapt to climate change,and financingfrom international partners is needed.At COP26,theUS, EU, UK, France, and Germany pledged to give $8.5bn to SA to finance its transition to alower carboneconomy. After greylisting, international financeflowsto andfromSA will beriddled withhigher compliance obligations and transaction costs. Evenif SA doesreceivethe funding,itis likelytoneed thesupportof otherforeign investorsand companies to successfully transitionto alowercarbon economy. Greylistingwill makeitharder forthecountry to achieve its ESG goals.

WHAT DOES SA NEED TO FOCUS ON?

The FATF hasidentified eight areasthatSA needstofocus on,which includeimproving SA’s risk-based supervision ofidentifiedrisks. SAisalso requiredto improvethe investigation andprosecution of serious and complex moneylaundering andterrorist financing activities. Competent authorities are alsorequired toensurethey have accurate and up to date beneficial ownership information.

Itis importantto notethat, asMauritius hasshown,SA can come offthe greylist withinaslittle astwoyearsif the government and the private sector co-operate to take decisiveactions toaddress the FATF’s concerns.The governmentis clearlycommitted to these actions. Finance ministerEnoch Godongwana,in hisbudget speechon February22,said the outstandingdeficiencies wouldbe addressedthrough regulationsand theeight actions summarised above. SAhasaplan ofaction,itis now about implementation.

Regulator brings clarity to status of crypto assets

Janice Geel

Werksmans Attorneys

In 2022, the regulator of financialservices inSA (FSCA) published a notice that extendsthe definitionof financial products to cover crypto assets

Thislong awaitedand simplechange hasfar-reaching consequences for parts of theinvestment fundssector andthe provisionoffinancial services. Soon no person may provide recommendations, guidance or proposals in relation to cryptoassets or to manage crypto assetsor provideany intermediaryser-

vices in relation to such crypto assets without a licence.

Since 2002, alicence has been requiredby anyone who wishesto provide clients withadvice, discretionary management or intermediary servicesin relation to financial products . This hasmeant that most serviceproviders to investors and investment funds, includingthe managers, generalpartners, investment advisersand administrators, have required a licence to provide these services. Anyonewho wishes, for example, to give recommendations on what

stocksa clientshouldbuy requires an FAIS licence”— a licence issuedunder the Financial Advisoryand Intermediary Services Act.

No suchlicence is requiredin relationtoassets thatare notdefined as financial products”— for example real estate. Prior to October 19 2022,anyone could,without any licence, provide advic e to clients in respect of crypto assets(which includes cryptocurrencies). Infact,a person could evenmanage a fund consisting of crypto currencies on behalfof clients without holding any licence and overSunday lunchmany

a grandchild became a crypto adviser or manageras a result.

The government s Crypto Assets RegulatoryWorking Group produced apaper in June 2021 in which they took the position that financial services in relationto crypto assetsshould beregulatedto protect consumers from scams. Thishas nowbeen achieved throughthe notice published recently.What this means is that itis no longer possible toprovide recommendations, guidance or proposalsin relationtocrypto assetsor tomanagecrypto assetsor provideanyinter-

mediary servicesin relation tosuch assetswithouta licence.

Consequently, many of the casualarrangements that have beenunregulated to date investment clubs investing intocrypto assets, for example will soon become regulated. Service providers tofunds holding crypto assets willnow also be regulated.

The change inthe law also represents an opportunity.

The FSCAis generally reluctantto grantlicencesto those who do not require them. Thischange therefore legitimises the crypto

industry, paving the wave for more formal arrangements between investors,product issuers andservice providers andthe formationofmore structured fundsand similar relationships tothat which alreadyexist inrespectof more traditional assets. In anticipationof this changeto thestatus ofcrypto assets, the Werksmans Investment Fundsteam has been involvedin advising crypto assetmanagers and advisors, crypto product issuers and platformson the structuring oftheir businesses and their regulatory compliance obligations in SA.

SA now has a negative reputation in the global economy and faces downgrades by rating agencies

/123RF NATATRAVEL

Need to find balance in the workplace

Johan Botes Baker McKenzie

An engaged, fulfilled andthriving workforce is a keygoal for all progressive businesses in 2023.

Thechallenges facedby both employersand employees in the workplace call for a redesign ofworkforce policiesthat areable tobalance the financial, employment and logisticschallenges faced by post-pandemicemployers, withthe individual employee’s searchfor meaning, flexibility and wellbeing.

According to PwC’s Global Workforce Hopesand Fears survey, one in five global workersplanned toquitin 2022.A fairnumber ofthem did, withemployers facing fresh challengesto recruit newtalent duetoemployees reassessing theirlives and goals during Covid-19.

A general unhappiness with theirworkplace environmentand asearchfor more payor moreflexible policies have allbeen cited as the reasonsfor themass migration ofemployees from one firmto another,or for downgrades or downscaling.

Morethan oneemployee seemed toconclude that living amore spartanlife but with greater peace and tranquillity was worth ditching someof theaccoutrements of high-end jobs.

This Great Resignation has affected mostindustries, and companies aroundthe world have been trying to find the most efficientstaffing models and flexiblearrangements within thosemodels to ensure they areable to meet staff expectationsand attract and retain the right talent.

THE SEARCH FOR MEANING

While workplaceflexibility has become a key negotiation point inemployment contracts, themodern workforce is alsoincreasingly demanding thattheir employer s activities matchtheir own personal ideals.This includes that the business operates in a sustainable way and provides benefitsfor theenvironment, local economies and thesurrounding com-

munities. Employeeswant to know theyare workingin a role that provides not only personal meaning,but that the business is fulfilling its responsibilities tosociety and the environment.

Employees, customers, shareholders and other stakeholders arealso demanding that organisations take a stanceon important issues suchas racism,sexual harassment, unemployment, and incomeinequality. Leading businessesare turning this challenge into a competitive advantageby creating workplaces withpurposeful engagement andways to accommodate a diverse set of employees withdiffering workplace needs.

GROWING IMPORTANCE OF MENTAL WELLBEING

For much of the pre-industrial era, what wasgoing on in the mindsof workerswas consideredto beof norelevance to thequality of their

gence, machine learning and automation has not eradicated theneed forcreative thinking instead, it has served to emphasise its immense value.

THE QUIET QUITTERS

While employersgrapple with retaining key talent, some employees optnot to vote withtheir feetwhen they are disgruntled they quietly quit. They do not actually resign orleave the service of their employer, but switch gears to “disengage” but continueto workand draw a salary with the same employer. Therisk ofstaff onlydoing whattheyare absolutely supposed to (or just enoughto notget fired)is often associated with poor workplace culture.

Employees whoare fearful of repercussionsare less likely to raise suggestions, put forward ideas on new ways of doing business, identify outdated practices or drive the businessin a new direction.

AT

BREAKING POINT

work. Workers were simply required to show up physically at the workplace.

Fortunately, businesses andour societyhavesince evolved. In our current economy, the mostcritical tool for any business is the intellectual property of its employees the workers minds.

Working atits best,the human mindis astate-ofthe-art piece of machinery, capable of painting the Sistine Chapel, writing the Google algorithm and calculating precise mathematicaltrajectories thatlanded Apollo11 on the moon. Givenits crucial valueto thebusiness, itfollows that the mental health of aworkforceshould beatop priority for employers, and employee wellbeingpolicies are nowan integralpart of forward thinkingbusinesses human resources strategies.

The rise ofartificial intelli-

The rise of quiet quitting in the workplace during 2022 has been attributed to various factors, including long working hours, lackof work/life balance, workplacebullying and beingtaken forgranted by their employers. Employers focused on making sure their top performers didn t leave cameto realisethat their nexttier ofemployees were as important, and warranted attention and rewards aswell.While keytalentis often mobile and such employees are likelyto leave when they feel disgruntled, employees who are less likelyto readilyfindmeaningful alternative employment may bemore inclined to stay and be unhappy.

This group of quiet quitterscould haveadisastrous effect on the business, turning a thrivingcompany intoa bureaucracy resemblinga poorly run state department.

For employers,the solutionliesin gettingthebalance right. Businesses must ensure that employees who have felt compelled to quietly quitareable tospeakup about exhaustion,frustration and grievances, and ask for assistance. Avoiding burnout and risks totheir mental

health will assist greatly in fulfilling the higher demands we place on employees to remain motivated.

The trend to silently slip away from one’s workplace responsibilities, literallyor figuratively, could place additional burden on other employees who are dedicatedto thecause.Employees who repeatedlyexperience an unbalanced workload are likely toquit whether they do so actually or quietly.

Employers should ensure their retention policies and projects aimto addressnot only their high-flyersbut all groups of employees needed to ensure the smooth running of the business.

Retention of staffis no longer enough retaining the commitment andmotivation of allemployed bythe organisation is critical for business success.

THE FOUR-DAY WORK WEEK

Likeyo-yos andhulahoops, the four-daywork weekhas excited generations, with the notion fadingover timeand becoming trendy again once those who were infatuated

withthe ideahave longforgotten the frustration of replicating moves made to look so simple by a select few.

Two globaloil companies were the first documented cases of modern companies adopting the four-day work week, back in 1940. Their drivers worked a schedule thatsaw themworking40 hoursinfour days(the4/40 system).

Research fromthe 1970s shows that the initial enthusiasmandpositive effectsofa reduced work week wane over time.Ivancevich &Lyon (1977) noted that employees working ona 4/40week reported increasedsatisfaction in respectof job security, autonomy and remuneration when compared toa comparator group, plus reduced anxiety and increased productivity. These results measured after 13 months from the commencement of the programme stood in starkcontrast tothe employee experiences recorded at 25 months.

All areasthat weremeasured declined bythe second survey the only aspect that remained positive after two years was the employees sense of personal worth.

A currenttrial conducted by4Day WeekGlobal,the think tank Autonomy, the 4 Day WeekUK Campaignand researchers at Boston College and Cambridge and Oxford universities continues to report success.

Inlate Novemberitwas

announced that 100 UK companies employing about 2,600 employees would permanently implementfourday weeks, with employees receiving the same salaries. Thisis consideredto bea positive step forthe four-day week campaign.

Further, employerswho are ableto correctlyidentify the right mixof workforce policies availableto themand then findways ofaccommodating andcommunicating with theirstaff tocreate meaning, purposeand wellbeing for them, are at a strategicadvantage whenitcomes to attracting and retaining the right talent.

• A redesign of workforce policies is essential to meet the requirements of employers and employees

THE RISE OF AI, MACHINE LEARNING AND AUTOMATION HAS NOT ERADICATED THE NEED FOR CREATIVE THINKING

EMPLOYERS SHOULD ENSURE RETENTION POLICIES AND PROJECTS AIM TO ADDRESS ALL GROUPS OF EMPLOYEES

BUSINESS LAW & TAX

ARB sets rules for crypto advertising

Crypto asset advertisements are nowregulated in SA, and crypto advertisers should beaware of the new requirements applicable to them.

Thebroadening ofthe ambit ofthe SAAdvertising Regulatory Board’sCode of Advertising Practice(ARB code) was announced on January 232023 andcomes hot ontheheels oftheFinancial Sector Conductof Authority’ s (FSCA’s) declarationlast October, announcingthe classification ofcrypto assets as a financial product.

The ARB code lays down a number ofgeneral principles

relevant to all forms of advertising,and providesforprinciples applicableto specific categories ofadvertising in section III. According to the newly inserted clause 17 of section III, advertisements for crypto assets in SA must now clearly statethat investingin crypto assets mayresult in the loss of capital, and this warningmust notbecontradicted by the overall message of the advertisement.

Crypto advertisements must beeasily understandablefor theirtargetaudience and provide abalanced message aboutreturns, features, benefits andrisks. Ratesof return, projectsand forecasts mustbe supportedbyadequate substantiation, including how these are calculated.

Whereinformation ispresented aboutpast perfor-

mance, itmust beclear the past performance is not indicative of future performance. Advertisers who are not registeredcredit providers must not encourage thepurchase ofcrypto assets on credit, though crypto asset providers are still able toprovide information regarding the payment methods that they offer.

Finally, “influencers” or “ambassadors” who promote crypto on their social media platforms are required to comply withthe rulesset out inthe SocialMediaCode. “Influencer” advertisements are increasingly popular and are notablymisleading because of their proliferation through social media. Influencers who promote crypto assetson behalfofcrypto asset service providers must

present factualinformation andmaynot offeradviceon crypto trading and investing, or the benefits associated with trading and investing.

These new requirements put inplace bythe ARBhave come at a fitting time, as the growing demand for crypto assets over the past few years has broughtwith ita litanyof crypto asset-relatedscams, which lure vulnerable consumerswith thepromiseof prosperity. For instance, in 2022 itwas revealedthat Mirror Trading International (MTI) succeeded in performing the largest cryptocurrency scam in South African history, defrauding investing South African consumers of more than R4.7bn.

Cryptocurrency scams such as theseare typically thinly-veiled schemeswhich seekto beguilemillionsof

VIEWPOINT AFRICA

unsuspecting consumers.

A particularly notorious case was the BitConnect scheme whichpresented itselfas a “high-yield investment programme”. In 2022, a grand jury indicted the founder of BitConnect for $2.4bnonthe basisthathe had orchestrated a global Ponzi scheme.Fraudulent investment programmes such asthese arenot limited to cryptocurrency,though, and nonfungible tokens have also been foundto be used for similar ends in the past two years.

Crypto scams typically require advertisements to succeed and gain adoption, typically targetinginexperienced consumers.These advertisements are easily spread through social media, and have a wide and susceptible audience, resulting in the

need for better rules to regulate crypto advertising standards.

Compliance withthe ARB’s new advertising standards rules should be a priorityfor cryptoassetadvertisers, asfacing anARB complaint can result in an adverse finding by theARB, and thoughthese rulingsarenot binding, they are generally accepted by the advertising and advertisement publishing community. Perhapsmore importantly, an ARB complaint canresult inreputational consequencesfor crypto asset advertisers.

These changes tothe ARB code, along with the regulation of crypto assets announced in2022, area clear indication the crypto regulatory environment is gaining rapid momentum in SA.

Why the bare arbitration clause works in Uganda

Phillip Karugaba

& Esther Namugenyi

Abare arbitration clause, like the one included in the Ugandan government s contract with Vinci Coffee, merely provides for the submission of disputes to arbitration without specifying the place of the arbitration, the number of arbitrators or the method for establishing the arbitral tribunal.

In Lakeside Dairy v International Centre for Arbitration and Mediation in Kampala v Midland Emporium (Mubiru J), the court ruled that such a clause remains valid and binding if the parties have shown a clear intention to settle any dispute by arbitration.

The arbitration clause is sometimes referred to as a champagne clause, because it is often drafted halfheartedly while the parties are toasting the successful negotiation of other clauses; or a sunset clause because it is drafted late in the evening; or the honeymoon clause because of the exotic venues for arbitration often selected

by the parties. Whatever the name and whatever the inspiration it is common to find bare arbitration clauses, even in Ugandan legislation.

The government had entered into an agreement with Vinci Coffee to establish a coffee processing plant in Uganda. In that agreement, the arbitration clause provides the dispute will be referred to an arbitrator appointed by both parties in accordance to the Arbitration and Conciliation Act

Many lawyers may cringe at all the missing customary detail from this arbitration clause such as the appointing authority, seat, venue, language and rules of the arbitration. It is easy to condemn the clause as pathological, missing in the essential detail to support smooth progress of dispute resolution by arbitration as described in the Lakeside case. Thankfully, the Arbitration and Conciliation Act steps in to supply the missing detail.

The act prescribes default settings to flesh out an arbitration clause provided that the parties have shown a

clear intention to submit their disputes to arbitration.

Where the arbitration clause has not specified the number of arbitrators, the default provision of the act is for a single arbitrator to be appointed by an appointing authority (being either the International Centre for Arbitration and Mediation In Kampala (Icamek) or the Centre for Dispute Resolution (Cader), upon application of either party.

The second default is that the language of the arbitration shall be English.

The act empowers the arbitrator or arbitral tribunal to flesh out all other details such as the rules of procedure, the place of arbitration and the law governing the dispute.

Tested against the prescription of the essentials of an arbitration agreement in the Lakeside case, this fleshed out Vinci Coffee clause works:

● It produces mandatory consequences for the parties;

● It excludes the intervention of the courts in the settlement of the dispute at least before the issuance of

the award;

● It gives powers to the arbitrators to resolve disputes likely to arise between the parties; and

● It permits putting in place procedure of the arbitration.

Under the Arbitration and Conciliation Act the court may only intervene to consider interim measures of protection, or if agreed by the parties to determine a point of law, to hear an appeal from such determination of a point of law or on an appeal from the award only on a point of law. The court is empowered to stay proceedings brought before it if there is evidence of an agreement between the feuding parties to submit their disputes to arbitration.

DISPUTE RESOLUTION UNDER THE INVESTMENT LAW

If the bare arbitration clause is between the government and a foreign investor, it is important to review the investment licence issued to that investor. Our investment law makes it mandatory for a foreign investor doing business in the country to

obtain an investment licence from the Uganda Investment Authority. The law also provides for options to deal with investor state disputes, ranging from negotiation, domestic and international to investment treaty arbitration.

Where the parties do not agree on the mode or forum of arbitration, then the dispute goes to litigation in the high court.

The practice is for the Uganda Investment Authority to simply annotate the investment licence, to crossrefer to the dispute resolution provision of the investment law without specifying a particular mode of dispute resolution.

Under the four-part test in Lakeside, this kind of annotation of the investment licence would not constitute

a submission to arbitration. An investor intending to submit to arbitration must specify the form of arbitration either in the investment licence or in a project implementation type of agreement as Vinci Coffee did. This may be especially important for investors wishing to seek recourse to the International Centre for Settlement of Investment Disputes in event of a dispute with the state.

The Vinci Coffee arbitration clause is not so bare after all, especially with the Arbitration and Conciliation Act. If a dispute should arise, either party should apply to one of the appointing authorities for the appointment of a single arbitrator. The arbitration will be conducted in Uganda under rules of procedure determined by the arbitrator.

But it is always best for the parties to place the bubbly on ice and flesh out this sunset clause first.

Phillip Karugaba & Esther Namugenyi are from ENSafrica Advocates in Uganda.

THE CLAUSE GIVES POWERS TO THE ARBITRATORS TO RESOLVE DISPUTES LIKELY TO ARISE BETWEEN THE PARTIES

Ashlin Perumall, Fatima Ismail & Gabriel Rybko Baker McKenzie

• Advertising Regulatory Board wants adverts to provide balanced message about returns and risks

CRACKING DOWN ON CRYPTO SCAMS

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Tax disputes: test all grounds of objection

Melanie Harrison ENSafrica

The SARevenue Service’s (Sars) appetite forlitigation seemsto have grown exponentiallyand adispute withSars tendsto endup inlitigation eitherin thetaxcourt orthe highcourt. Suchadispute will generallyarise whena taxpayer disagreeswith an assessment raised by Sars. Oneaspect ofthedispute process which can be overlooked withdire consequences for taxpayers is that a taxpayermust fromthe outset canvassall relevant grounds of objectionas these grounds form the basis of any future litigation.

Inthe Commissionerfor the SA RevenueService v Airports CompanySA, the facts were, inter alia, that Sars raised anadditional assessment for thetaxpayer’s 2011 year ofassessment, pursuant to the disallowance of deductions ofcorporate social investment (CSI) expenditure and allowances interms of section 13quinand 12Fof the Income Tax Act, 1962.

Thetaxpayer lodgedan objection tothe additional assessment raisedby Sars.It only objected to the disal-

TAXING TIMES

lowanceof theCSIexpenditure. No objection was lodged to section 13quinand section 12F allowancesand the imposition ofan understatement penaltyand interest. Theobjection tothedisallowanceof theCSIexpenditure didnot findfavour with Sars and thetaxpayer lodged a notice of appeal in respect of the disallowance of the CSI expenditure. Thiswas ultimately settled.

In2019, Sarsissued aletter of audit findings in respect of the taxpayer’s 2012 to 2016

IN THE TAXPAYER’S HEADS OF ARGUMENT … HE WISHED TO REVISIT CERTAIN QUESTIONS OF FACT AND INTERPRETATION

years of assessment. Consistent withits earlierstance adopted inrespect ofthe 2011 tax year, itindicated it intended to disallow deductions claimed bythe taxpayer in respect of the CSI expenditure,the 13quinand12F allowances, and to impose understatement penalties and interest, in terms of the

Tax Administration Act, 2011).

This promptedthe taxpayerto revisitits 2011objection in which it had not objected to Sars’ disallowanceof itsdeductionsin terms ofsection 13quinand 12F. Followingthe above,the taxpayer requested Sars to agree to the taxpayer’ s amendment of its objection in relation to its2011 year of assessment. The taxpayer sought to object to the adjustmentseffected bySarsin respect of the allowances claimed in terms of sections 13quin and12F, aswell asthe imposition of understatement penalties and interest.

Sarsrefused toallowthe objectionas itwas ofthe opinion that section 104 of the Tax Administration Act, read with rule7 ofthe taxcourt rules, precluded such an amendment andthat thetaxpayer was seekingto introduce newgrounds ofobjection, which was impermissible in terms of rule 32(3) of the tax court rules.

The taxpayerapplied to the tax court in Johannesburg for leave toamend and such leave wasgranted bythe tax court. This decision was overturned on appeal.

In Nesongozwiv Commissioner forSars, thetaxpayer was unsuccessful in

the taxcourt. Inbroad terms thematter turnedonthe value of shares disposed of by the taxpayer and resultant donations tax and capital gains taxliability ofthe taxpayer and in this regard evidence was ledby various experts asto thevalue of such shares. The taxpayer was unsuccessful in its appeal to the full court of the high court on the basis as set out below. The decision of the high court was upheld on appeal to the appeal court.

Inthe taxpayer’s heads of argument, it appeared that he wished to revisit certain questions offact andinterpretation. The court found that this raisesan important point of principleanterior to the merits, namely whether these points are properly beforethis courtasgrounds of appeal.

This was becausethe tax courtisa creatureofstatute with theresult that,as was held inLion MatchCompany (Pty)Ltd vCommissionerfor the SA RevenueService, the scope of itsjurisdiction, its powers andthe ambitof anyrightof appealfromits decisions aredefined inthe Tax Administration Act.

The same principle was applied, in relationto an appealto thetax courtin terms of the Value Added Tax Act, 1991,in HRComputek (Pty) Ltdv Commissionerfor theSA RevenueServices when Ponnan JAheld that it hadfollowed that “not having raised an objection to the capitalassessment inits notice ofobjection, thetaxpayerwas precludedfrom raising iton appealbefore the tax court”

The purpose underpinning this principle (which is of generalapplication incivil and criminal appeals too) was setoutthus byCorbettJAin MatlaCoal LtdvCommissioner for Inland Revenue in a matter concerning theIncome Tax Act: “Section 81(3) of the act provides that every objection shall be in writing andshallspecify indetailthe

EVERY OBJECTION SHALL BE IN WRITING AND SHALL SPECIFY IN DETAIL THE GROUNDS UPON WHICH IT IS MADE

grounds upon whichit is made. And in terms of section 83(7)(b) theappellant inan appealagainst thedisallowance of hisobjection is limited to the grounds stated inhisnotice ofobjection.This limitation is for the benefit of thecommissioner andmay be waived by him.”

He stressed the importance of adherenceto this principle, “for otherwisethe commissionermay beprejudiced by an appellant shifting the grounds of his objection to the assessment in issue”. At thesame time,however,he heldthat inthe applicationof the principle, acourt should not be “undulytechnical or rigid in its approach” and should look atthe substance ofthe objectionand theissue astowhether itcoversthe pointwhich theappellant wishesto advanceonappeal must be adjudgedon the particular facts of the case

Thus, in both judgments referredto above,theprinciplethat ataxpayercannot introducenew groundsof objection after the fact is reinforced. Careful consideration should be givento the merits bytaxpayers whenpreparing grounds of objection.

Focus on fresh produce market impediments

Clara Hansen & Angelo Tzarevski

Baker McKenzie

On February 14, the Competition Commission(commission)published theFresh Produce MarketInquiry Termsof Reference,announcingits intentiontoconduct a market inquiry into the fresh produce market of SA.

Themarket inquirywill commence atleast 20business daysafter thepublication of the terms of reference (ToR).

InNovember 2021,the commission conducted a studyinto marketconcentrations, identifying concerning levels of concentration in SA s freshproduce andagro-

processing sectors.During its study, thecommission noted that thesharp declinein the number of commercial farms could be as aresult of the challenges small-scale farmers facein reachingthe economies ofscale to decrease costsand maintain profitability. The commission, noting theessential roleagriculture plays in the South African economy contributing tofood production and security,job creationand raw material supply to agroindustrial and manufacturing sectors has prioritised the food andagro-processing sector inits Prioritisation Framework since 2008.

The commission is of the opinion thatthe market

inquiry is essential to understand thestate ofcompetition within theindustry, themarket featureswhich affect price outcomes,the challenges faced byfarmers and the importanceof thesector to boththe economy, employment andthe welfare and health of citizens.

Thefocus oftheinquiry will beon identifying whether thereare any

impediments within the markets that restrictor distort competition andmarket outcomes. The inquirywill focus on both particularand ancillary issues at each layer of the valuechain,from thesaleof fresh produceby thefarmer to the customer.

Following public comments and inputs from stakeholders, interactionwith retailers and toa certain extent endconsumers will not be excluded from consideration duringthe inquiry. The commission has announced thatthe inquiry will be limited to certain fresh produce items, a list of which is yet to be published.

The commission has identified threebroad themes

for the inquiry, which will address theimpediments to competition andmarket outcomes.The firstis theefficiencyof thevaluechain, withan emphasisonthe dynamics aroundfresh produce marketfacilities. This themeis basedonconcerns raised by stakeholdersin the markets, thatthe valuechain atthelevel oftheNational Fresh ProduceMarkets is inefficient and uncompetitive.

The second area of focus is the market dynamics of key inputs and its impacts on producers, namelythe presence of pricediscrimination, buyer power and exclusivity.

Third, thecommission will consider the barriers to entry, expansionand partici-

pation in the fresh produce market. Specificconsideration will be given to the barriers faced bysmall, medium and micro enterprises (SMMEs) and firms owned or controlled byhistorically disadvantaged persons (HDPs). Thethird themewillalso involve consideringpieces of legislation andthe conductof other regulatoryor government entitiesin relationto such legislation.

The marketinquiry will commence afterthe publicationof thefinalToRand ona date to becommunicated by the commission.The final report willbe completed within 18 months after the commencement of the inquiry.

• All relevant grounds of objection must be considered from the outset

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THE FINAL REPORT WILL BE COMPLETED WITHIN 18 MONTHS AFTER THE COMMENCEMENT OF THE INQUIRY

BUSINESS LAW & TAX

ChatGPT: making poetry of law

Kyra South & Janice Geel

Werksmans

Only two months ago, OpenAI Incorporated (OpenAI), a US artificialintelligence (AI) research laboratory, launched theChat Generative Pre-trained Transformer, more commonlyknown as “ChatGPT”

Sincethen, ChatGPThas takenthe worldbystorm with users posing a vast array of questions on theapp on a daily basis.However, the question remains whether ChatGPTisreally heretostay and whetherprofessions and academic institutionswill need toevolve tokeep up with thesetechnological advancements.

ChatGPT is based on a large languagemodel chatbot that uses dialogue to provide aresponse tothequestion that a user poses on the ChatGPT website.

Thelarge languagemodel consists ofabout 175-billion parameters, which was trained on roughly570 gigabytesof text,sourcedfrom

text databasesfrom various internet sources.It incorporates reinforcementlearning with humanfeedback (RLHF) to provide userswith written paragraphs ofcontent which appearas iftheuser hasgenerated the text response.

TheRLHF modelthat underpins ChatGPTincorporates machinelearning into ChatGPT. Therefore,the moreusers makeuseof ChatGPT, thebetter thetext responses generatedby ChatGPTwill becomeasthe ChatGPT algorithmbecomes more equippedat predicting text responses.

Despite the impressive responses generatedby ChatGPT, wenote thatthe disclaimer states ChatGPT may generateincorrect or misleading informationand, as a result,ChatGPT is not intended to giveany advice. ChatGPT alsoprovides further disclaimers when a user poses a sectoror professionspecific question,suggesting the userobtain professional advice.

Nevertheless, recent studiesbythe UniversityofMinnesota andthe Universityof Pennsylvania foundthat

ChatGPT is ableto pass law and business examinations with an average C+ or B grade (in SA terms roughly between 50% and 69%).

In December2022, Andrew Perlman, dean of the Suffolk UniversityLaw School inBoston, alsotested ChatGPT by providing a series ofprompts toChatGPT for tasks such as:

● Drafting abrief tothe US Supreme Courton whythe court should not overturn same-sex marriages;

● Developing a list of depositionquestions fortheplaintiff ina motorvehicleaccident; and

● Drafting a contract of sale of realestate inMassachusetts.

Perlman notedthat the responses by ChatGPT were a good startingpoint to preparelegaldrafts andhassignificantpotential todealwith access to justice issues in routine legal matters.

Perlman further noted that legal practitioners can use technology such as ChatGPT to enhance the quality of their work.

Even though AI,like that provided by ChatGPT is currently not entirely accurate, the possibilitiesfor AIare endlessdue totheinherent machine learning embedded in it.

AsAIlearns moreandits responses become more accurate, users may decide to rely more on AI for routine

TAXING MATTERS

issues. Consequently, AI may behere tostay;however, human intervention will still play anintegral partin resolving morecomplex issues, whichAI maynot be able to resolve.

Professional and academic institutions will therefore need to adapt and evolve to keep up with these technological advancementsto ensure they can meaningfully incorporate ChatGPT in their work quality and efficiency.

ThusChatGPT isnotnecessarily the beginning of the end that willmake human intervention obsolete, but it canbethe magicbulletthat enhances professionaland academic institutions.

Ifyouare stillnotconvinced about the capabilities ofChatGPT,here isashort poem written by it. ChatGPT and theLaw illustratesthat ChatGPT iscognisant ofits own limitations while simultaneously highlighting how it could be used by legal practitioners as atool to enhance the profession.

ChatGPT and the Law ChatGPT, amodel trainedin the law

An AI with knowledge vast and raw

A tool that helps with every need

In legal matters, it truly excels indeed

With itsvast database, ChatGPT knows the score

Helping us navigate through legal wars

It helps usunderstand what’ s right and true

And always answers,with a point of view

Thelaw iscomplex,and sometimes hard to grasp But withChatGPT, wecan move forward fast Itsknowledge isalways upto date

And with its answers, we won ’t hesitate

So let us usethis AI with care

And trust its answers, beyond compare For ChatGPT is here to serve In thelaw, italways hasthe verve Solet usthank thismodel so bright And always use it, with all our might For inChatGPT, wehave a friend In thelaw, itwill alwayshelp us to the end.

The poemwas generatedon ChatGPT on January 29 2023.

● Reviewed by Natalie Scott, Director and Head of Sustainability, Werksmans Attorneys

When a genuine mistake can rule out a penalty

The Tax Administration

Act’s (No 28 of 2011) understatement penalty regime imposes penalties on taxpayers whose tax positions have resulted in prejudice to the South African Revenue Service (Sars) or the fiscus.

The legislation does not provide Sars with a discretion on imposing understatement penalties in the case of prejudice. Instead, the act is instructive that an understatement penalty must be imposed.

The penalty s quantum depends on a specified list of behaviours by taxpayers that Sars deems to have been present in the circumstances. Each understatement in a tax period is investigated to determine which, if any, of the listed behaviours applies. These behaviours range from reasonable care not taken in completing a tax return , for which a minimum penalty of 25% is imposed, to the harshest penalties imposed for intentional tax evasion , being up to 200% the higher the degree of culpability, the more severe the penalty. Identifying the appropriate behaviour for imposing a penalty in each

case is one of the few instances where the burden of proof is on Sars and not the taxpayer.

The only departure from the Tax Administration Act s instruction to impose a penalty is where the prejudice to Sars or the fiscus resulted from a bona fide inadvertent error on the part of a taxpayer.

In recent years, many cases that have proceeded to the tax and other superior courts have dealt with understatement penalties and substantial tax matters. In many cases, the imposed penalties have been upheld.

SHIFT IN APPROACH

We have, however, recently seen a shift in our courts approach to the interpretation of the legislation dealing with understatement penalties, particularly on two grounds:

Sars’s identification of the relevant behaviour which has resulted in the prejudice and what constitutes a bona fide inadvertent error to escape penalties in its entirety.

Regarding the first matter, there appears to have been a practice that Sars, rather than identifying the appropriate behaviour and then applying the penalty percentage that corresponds with that behaviour, simply chooses a percentage penalty that it feels should apply in the circumstances with no regard to the appropriate behaviour.

In Lance Dickson

Construction CC v Commissioner for the South African Revenue Service delivered out of the Western Cape High Court on January 31 2023, the court called foul on such an approach by the commissioner and confirmed that the prejudice did not entitle Sars to then impose any penalty it considered applicable . The court went on: It follows that if, for example, Sars finds that there has been an understatement based on the taxpayer s failure to take reasonable care in

completing its return, it must impose the 25% penalty: it does not have any discretion to lower the percentage. Similarly, if the behaviour category relied on by Sars is the absence of reasonable grounds for the tax position taken, it must impose a 50% penalty. There is thus no statutory basis to impose a 25% penalty in respect of behaviour falling within the ambit of item (iii).

Although a high court decision only, it is optimistic that the judiciary has called out Sars in their imposition of understatements, based on percentages only, without regard to the legislated list of behaviours which should determine the amount.

More encouraging is that we now have two Supreme Court of Appeal cases that have dealt with bona fide inadvertent errors, which should preclude any understatement penalties from being imposed. In practice, Sars has taken an extremely strict (and possibly incorrect) interpretation of what constitutes a bona fide inadvertent error. In CSARS v The Thistle Trust delivered on November 7 2022, the SCA dealt with the

understatement penalty swiftly and noted “Sars initially adopted position that, in the light of the legal opinion, it should be concluded that the Thistle Trust had consciously and deliberately adopted the position it took when it elected to distribute the amounts of the capital gains as it did. However, during the argument before us, counsel for Sars conceded, correctly, that the understatement by the Thistle Trust was a bona fide and inadvertent error as it had believed that s 25B was applicable to its case. Though the Thistle Trust erred, it did so in good faith and acted unintentionally.

In the Coronation matter delivered on February 7 2023 (which refers to Thistle Trust), a similar position was taken: Nor is there anything to suggest that CIMSA s tax

WE NOW HAVE TWO SUPREME COURT OF APPEAL CASES THAT HAVE DEALT WITH BONA

FIDE INADVERTENT

ERRORS

returns were not submitted in the bona fide belief that CGFM may be eligible for a s 9D exemption. The fact that this court has now found that this course is not open to it, does not in any manner reflect on the bona fides of CIMSA, any more than it reflects on the bona fides of any losing party in litigation.

The SCA now accepts that a party, in the mistaken belief that their position is accurate can still rely on the exclusion from the imposition of penalties where their bona fides can be demonstrated.

In these cases, the High Court judges and the SCA justices are applauded for bringing some sense of sanity to a penalty regime that has become almost a standalone area of litigation. Practitioners hope these judgments will either have Sars relook at their application of the legislation or, better yet, a change in legislation altogether by parliament.

● Pieter Janse van Rensburg is a director at AJM Tax. He also serves as a nonexecutive director on the board of the South African Institute of Taxation

• Possibilities for future use are endless through machine learning

PIETER JANSE VAN RENSBURG

TECH TAKEOVER?

/123RF MILKOS

Copyright for AI works still unresolved

Werina Griffiths

Adams & Adams

If a userwere to provide an artificialintelligence (AI)program, suchas ChatGPT, with a storyline and it produced a bestselling novel, would that novel be protected by copyright? And ifit is, whowould own those rights?

There has beenan explosion of interest in AI platforms following the launchof OpenAI’sChatGPT servicewhich attracted more than 1-million usersinthe firstfourdays after its launch.

Headlines that ChatGPT canmake giftrecommendations,debug code,passan exam, as well as write essays, academic articles,comedy routines, recipes and even music,notonly holdtruebut demand consideration of whatishappening, howitis happening andwhat the potentialimplications arefor IP rights and their owners.

ChatGPT is a chatbot technology, whichmeans itis a computer program that uses AIand naturallanguageprocessing to understand questions and then automate responsesto them.Chatbots

are powered by large amounts of data and machine learning techniquesthat enable themto makepredictionsregarding themost accurate answer to the question, which is then formulated and provided to the user.

While the first of its magnitude, ChatGPTis notthe only AIplatform capableof generating content in this way. Prior tothe launch of ChatGPT, OpenAI had already launchedan AIgraphicstool called DALL-E which can

human mind are protected by thedifferentforms ofIPand, in particular, copyright.

Putting the theories to the test, the artwork accompanying this article (let’s call it “The Robot”) was created using OpenAI’s DALL-Eprogram by entering the text prompt “ a robot painting on canvas, expressionism”. Within what felt like seconds, the hype around thetechnology became very real when the resultof thetextprompt delivered something that is, at leastin principle,certainly copyright protectable.

ARTIFICIAL ART?

The Robot was created using OpenAI s DALL-E program by entering the text prompt a robot painting on canvas, expressionism

convert textinto graphics. One can only imagine that the possibilities for creators become endlessif allthat is required is a simple text prompt.

Traditionally, workscreatedthrough theintellectual or creativeefforts ofthe

Oneof thegreatestbenefitsof copyrightprotectionis that itcomes intoexistence automatically. Themoment a workis createdthatqualifies for copyright protection, it is protected. Therefore,if AI generated contentsatisfies the requirements for copyrighttovest, it,too,couldbe protected in whichcase the rights in and to that work will belong to someone.

The Copyright Act in SA differentiates between the traditional authorialworks (eg literary, musical and artistic) and such works that are computer-generated . The Robot would qualify as a

computer-generated artistic work. So far so good.

The next step relevant to this discussion isto determine whether thework was “original” in its making and, to answer thatquestion, we havetoconsider totheskill, effort and labour expended by the author in the creation of thework. AIgeneratedcontent has no human author, but the Copyright Act dictates that the “author” of acomputergenerated work is the person responsiblefor makingthe arrangements for the creation of the work.

The meaning of “making the arrangementsnecessary for the creationof the work” isnot entirelyclear andit is likely here that the debate will arise.

The firstpotential argumentisthat thedeveloperof the AI could bethe author, as defined, forhaving made arrangementsthat werenecessary for the work to be created.

However, when it comes to programs suchas ChatGPT,DALL-E andothers whichgenerate worksby

making independent decisions in determining what the work should look like, the results generated by the programs arenot fixed,nor are they designed by the developer.In fact,the resultscannoteven bepredictedor expectedby thedeveloper anddepend inthefirst instanceon somethingthatis conceptualised by the user.

The proximityof the developer to the work createdascompared totheinput of the user leadsto a second potentialargument, whichis that the user could be considered the person responsible for making the necessary arrangements for thework to be created.

MAKING OF THE WORK

Once theauthor hasbeen identified, it isnecessary to consider whether the author’s efforts in creating the work were sufficient to renderthe workoriginal inits making, suchthat itwill be protectedby copyright.This will involvea factualinquiry around themaking ofthe work in each instance.

The answers to the question of copyright ownership over AI generated content are not straightforward and require careful consideration. While thetechnology gains speed and attention,and legal mindsexamine itsimplications, the take-outwould be toembrace thepossibilities with the awareness that they are not risk free.

As forThe Robot, OpenAI’s terms currently state thatany rightsarising fromthe creationofworks areassigned tothe usersubjectto compliancewiththe terms ofthe useragreement.

The terms also contain a licence in favour of OpenAI to continue usingthe content generated and a warning that the AI programmay generate the same or similar output for other usersgiven thenature of machine learning.

TheRobot thereforefinds itselfin apositionthat isneither certain nor unencumberedwhichpoints tothefact theuse ofAIto generatecontentfor commercialexploitationshould beapproached with extreme caution.

Benefits of caring for employees’ wellbeing

Jonathan Goldberg & Grant Wilkinson Global Business Solutions

According to the 2022 Sanlam Benchmark Survey, moreand moreemployers areoffering employeebenefits that aimat supporting their employees holistic wellbeing.

This emphasis on employeemental andphysicalhealthhas beenseenin many countriesabroad which havegone so faras to pass legislation mandating that employeesare ableto enjoy theiroff timewithout beingcontacted bytheir employers after hours.

For instance,Belgium passeda lawinFebruary 2022protecting civilservantsfrom reprisalsfor switchingoff workemails,

textsand phonecalls received out of hours.

Post-pandemic, many South African employers have takento offeringtheir employees flexible work contractsand onlyrequiring themtocome totheofficeon certain days of the week.

Although this new arrangement hasintroduced anumberof benefits such as loweredoffice-related expenses ithas also broughtalong anumberof complexities interms of,for instance, rethinking the company s performance management system.

the option of a flexible employment contract, you needto keepin mindthat thesecontracts needto bein keeping with the standards as set out in the Basic Conditions of Employment Act (BCEA).

Forinstance, theactstates that employeeswho earn below thethreshold of R224,080.30 mustnot work morethan45 hoursinany week, nine hours aday if an employeeworks fivedaysor lessa weekoreight hoursa dayifa workerworksmore thanfivedays aweek.For those employerswhich have employees whohave the ability to workmore hours from homethis doesnot mean that theycan be compelled to do so.

YOU CANNOT USE A

CONTRACT AS A MEANS OF DISCRIMINATION

The EmploymentEquity Act (EEA) promotes equity in the workplace, ensuresthat all employees receive equal opportunities andthat employees aretreated fairly by their employers.

The lawprotects employees fromunfair treatment and any form of discrimination. You cannotoffer flexible employment contractsto employees basedon arbitrary grounds.These contractsneed tobe awardedto staffmembers basedon afair system that has sound reasoning behind it.

The perception of bias also becomes adifficult thingto manage between employees from differentdepartments with different arrangements.

TAKE ANY COLLECTIVE BARGAINING AGREEMENTS INTO ACCOUNT

During yourdecisionmaking processsurrounding flexible employmentcontracts, alwaysconsult any collective bargainingagreements that you may have withany unionsthat areaffiliated toyour organisation. These agreementsmay contain clauses that address the issue offlexible employment contracts although at the normal level ofcollective bargaining this is notan issue. It isimportant wherethecollective bargaining agreement has been expanded to office and clerical employees. Some challengescan be expected here.

Overall, flexible employment contractscan provide

manybenefits foremployers including:

● Increased productivityas employees areable towork inenvironments thatare most suitable for them;

● Lower absenteeismas employees who are on these types of contracts are often moremotivated andless likely totake time offwork as they havemore controlover theirworking hoursand environment;

● Increased employee engagement asemployees feel valuedand supportedby their employer; and

● A competitive retention strategy.

As withany decisionin your business,weigh upthe pros andcons offlexible employmentcontracts sosee if it will bring a tangible ROI to your organisation.

• Questions remain over who would own rights of content generated by artificial intelligence programs

ONE OF THE GREATEST BENEFITS OF COPYRIGHT PROTECTION IS THAT IT COMES INTO EXISTENCE AUTOMATICALLY

Why you need cyber insurance

Darren Willans & Sarah Passmoor

Werksmans

Cybercrimes and business interruption are becoming prevalent, posing a threat to companies, especially thosewith online business models.

Ifyour companystores customerdata, youmaybe targeted for ransomware attacks, as well as other sinister formsof cybercrimes. Cyber insurance should be an essential aspect of a company ’s riskstrategy in response to this form of business interruption.

In2021, cyberincidents wererankedas oneofthe highest threatsto businesses in SA, havingincreased by 150% since 2020.

Because this area of insurancelaw isconstantlyevolving and can bevague, it is essential your company ensures thatpolicy clauses are notonly clearand unambiguous,butalso the policy is up todate soit catersfor the current cyberrisks, which are evolving at a rapid pace.

Many businesses are operating underthe false belief thattheir current insurance policy adequately covers data security and privacy exposure.

This is not necessarily the case, astraditional insurance policiesoften donotadequately cater for the exposure organisations facein this sphere.

Companiesare inthis regard cautionedto beparticularly mindfulof specific aspects oftheir insurance

coverage, some of which are set out here.

THE ALL-RISKS CLAUSE

A potential issuethat may arise in a business interruption claim iswhere a cybercrimeis onlycoveredunder all-risks clauses.All-risks policies have historically included claimsfor business interruption, whichrespond to loss arising from physical damage to property. Thismay proveproblematic if your business is subject to a cyberattack, as “physical damage resultingin financial loss” typically doesnotcover ransomware attacks, or other cybercrimes.

liabilityclauses whichmay proveproblematic intheface of acyberattack isthat allrisksclauses ofteninclude timedeductibles andindemnity periods, stating that loss coverage onlybegins aftera specifiedperiod. However,a cyberattack lasting fora fractionof theapplicabletime periodcould bedevastating for a business.

For example, in 2016 Delta Airlinesexperienced anetwork failure forsix hours, which cost the airline about $150m.Another exampleis the Facebook outageof 2021, also only lastingfor about six hours, which resultedin a decrease in revenueof more than $60m.

THE NATURE AND QUANTUM OF THE LOSS

This is because electronic data or informationis often not interpreted as having a physicalexistence. Assuch (in the absenceof special extensionsunder thepolicy), acyberattack andcybercrimes affecting electronic dataand,in turn,causingan interruptionto one’s business, isoften notcovered underan all-risksclause,as physicaldamage toproperty is notsomething thatis easily established.

TIME DEDUCTIBLES AND INDEMNITY PERIODS

Anotheraspect ofgeneral

Establishinga causeand identifyingthe natureand quantum ofthe lossincurred isafurther aspecttobe mindful of insofar as your insurancecontract isconcerned.Damage toproperty is generally easier to prove thanestablishing avirtual cause.This isall themore reasonfor yourcompanyto ensure an estimatedquantum and the potential nature and causeof acyberattack is clearlydelineated intherelevant policy.

COVERAGE FOR RANSOMWARE

Whilemost standalonecyber policies coverransomware as aperil, not allpolicies offer thenecessary coveragefor lossesassociated withit. Coveragefor lossassociated withransomware shouldfall under “cyber extortion coverage”. This coverage

shouldensure thatextortion paymentsare accountedfor, aswellas coverageforanIT forensic investigatorwho would be required to asses whatdata hasbeenaccessed, aswellas thelevelofsensitivity of that data.

THIRD-PARTY COVERAGE

Companiesmay alsobeheld accountable for third-party liability inrelation toprivacy andsecurity incidentsand shouldtherefore havecoverage which protects the company(as theinsured) forliabilityresulting fromtheloss ofpersonal andcorporate confidential information.

The coverageshould extend to the failure to protect

clientrecords anddata, intellectual property infringement throughmismanaging customer data, impaired customeraccess tothe insured’s computer systems and privacy intrusion through cyber activity.

It is important to bear in mind that a company itself does notnecessarily haveto be the target of a cyberattack

CYBERCRIMES CAN PERMEATE A COMPANY’S SUPPLIERS AND OUTSOURCED TECHNOLOGY PROVIDERS

tobe affected.Cybercrimes canpermeate acompany’ s suppliers andoutsourced technology providers,which may in turn cause collateral damage to the company.

The insurance industry as a whole seems to be moving towardtackling cyberbusinessinterruption risksby consultingwith ITsecurity companies, not only to calculate risk but also to provide forspecific delineatedcoverage inthis area.Very few cases have todate been tested in court.

From a risk mitigation perspective, companiesare advisedto carefullyanalyse thescope oftheir coverand to havecareful regardto the wording of their policies.

• Traditional insurance policies often do not adequately cater for exposure to cyber crimes

A CYBERATTACK, AND CYBERCRIMES AFFECTING ELECTRONIC DATA, IS OFTEN NOT COVERED UNDER AN ALL-RISKS CLAUSE

/123RF

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