ezine

12 Apr 2010

Indemnities are one of the most contentious aspects of IT contract negotiations. How do you respond to, or take advantage of, the legislative provisions that limit government departments and Crown entities from providing indemnities? And if you, as a provider of IT services to the public sector, cannot get an indemnity, does this really present a big risk? In this article, "An Indemnity? Sorry but we can't", Don Holborow and Jonty Vavasour discuss the nature and extent of indemnities that may be given in the public sector with a particular focus on the IT environment.

In our second article "The Anti-Counterfeiting Trade Agreement hits New Zealand" in light of the negotiations for the Anti-Counterfeiting Trade Agreement (ACTA) to be held in Wellington, New Zealand this month, Earl Gray and Nicola McCarthy take a look at the basics of the ACTA and the recent controversy surrounding the negotiations.

On 16 March 2010, Steven Joyce (the Communications and Information Technology Minister) announced that Cabinet has approved the Government's Rural Telecommunications Strategy, a key part of the Government's strategy to increase New Zealand's global competitiveness. The Rural Telecommunications Strategy sets out the Government's proposals to improve the availability and quality of telecommunications services in rural areas. These proposals are detailed in the Ministry of Economic Development's "Rural Broadband Initiative - Proposal for Comment" and "TSO Reform and Funding Telecommunications Development - Proposal for Comment". In our third article for this month, "Rural Telecommunications Strategy", Karen Ngan and David Alizade look at both of these proposals and the next steps for implementing the proposals.

Finally the Australian Federal Court recently held that copyright did not subsist in the White Pages and Yellow Pages telephone directories. In this article, "Australia: No Copyright in Telephone Directories. What does this mean for New Zealand?", Richard Watts and Sonya Hill look at what this means for New Zealand.

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An Indemnity?  Sorry But We Can't

Indemnities are one of the most contentious aspects of a commercial IT agreement.  Concessions on both the scope and extent of the indemnity are negotiated at length. The position is further complicated in the case of government departments and crown entities, which are legally prevented from giving most types of indemnity.

This article will examine the legislative basis for a Government Department or Crown Entity to refuse to provide an indemnity.

An Indemnity - What Is It? 

It is useful to first define what an indemnity is. In this article, we will use an example of a government department entering into a contract for IT services with an IT supplier. 

In its simplest form, an indemnity is a promise that the indemnifying party (the government department) will keep the indemnified party (the IT supplier) protected from loss that results from the government department's acts or defaults.  An indemnity provides an extra remedy for the IT supplier, in addition to normal damages under breach of contract. However, it is available only in respect of those losses that are specified in the indemnity provision. 

An indemnity can protect the IT supplier from two types of loss. The first type is loss that the IT supplier suffers directly. For example, where the IT supplier has its system corrupted by data supplied by the government department. This type of loss is referred to as party-to-party loss. The second type of loss is where the IT supplier suffers loss because it is sued by a third party, as a result of acts or omissions on the part of the government department. This type of loss is referred to as third-party loss. To address the potentially limitless risk involved when providing an indemnity, indemnities are usually limited by a monetary cap. 

It is standard practice to include indemnities in IT agreements. A common type of indemnity is an Intellectual Property (IP) indemnity. This is an example of a third-party indemnity, where the government department indemnifies the IT supplier for any claim against it by a third party that the IT supplier is breaching the third party's IP rights as a result of the actions of the government department. 

Government Departments

  

Some Third-Party Indemnities Allowed 

The Public Finance Act 1989 (PFA) regulates the provision of indemnities by government departments. Under the PFA, it is unlawful for any person to give an indemnity on behalf of the Crown unless expressly authorised by an Act. The PFA provides for two exceptions to this general rule: 

• the Minister of Finance can give an indemnity on behalf of the Crown to a person, organisation or government department if it is in the public interest to do so; and
• a government department can grant an indemnity, in the name of the Crown, if it is authorised by the Public Finance (Departmental Guarantees and Indemnities) Regulations 2007 (PF Regulations), and it is in the public interest to do so. 

The PF Regulations provide that a government department may give an indemnity in the name of the Crown in two main situations:

• where the indemnity is contained in standard terms and conditions for the use of IT services, including software or an internet site (Standard Terms Indemnity); and
• in respect of an IP claim against an IT supplier (IP Indemnity).  

The Standard Terms Indemnity is a very recent development that resulted from an amendment to the PF Regulations on 26 February 2010. It allows government departments to accept terms and conditions, such as those that appear on internet sites, where it is not possible or practical to negotiate with the IT supplier.  

The IP indemnity is relatively common in IT agreements and it is explicitly provided for under the PF Regulations. Accordingly, an IT supplier could seek this type of indemnity when negotiating an IT agreement with a government department. 

This exemption for IP indemnities contemplates that the government department will have the right to certain data. If the IT supplier uses the data provided by the government department, and a third party claims that this use breaches its IP rights and seeks damages from the IT supplier, the government department will indemnify the IT supplier for such damages. This is a third-party IP indemnity. This indemnity is particularly important in an IP context because damages tend to be difficult to quantify. The indemnity allows the parties to agree in advance as to who will pay for different types of losses that may happen under their contract.  In the absence of an indemnity, the IT supplier may be stuck with losses that should, arguably, be the responsibility of the Crown. This is because the IT supplier will be prevented from claiming loss that occurred outside the terms of the contract. 

Party-to-Party Indemnities Not Necessary

But what about indemnities for other types of loss? Agreements often have more general indemnities for loss incurred by one party, due to a breach of the agreement by the other party. This type of indemnity is not provided for under the PF Regulations. However, such an indemnity may not be necessary. A government department's main obligation will be to pay for the services provided and, if the government department breaches this requirement, the IT supplier can claim damages under the contract. In this scenario, damages are an adequate remedy, and an indemnity is not generally necessary.  Where the IT supplier wants protection against a specific act or omission by the government department, the IT supplier can always seek to have a specific obligation included in the agreement. 

Public Interest Must Always Be Considered

It is also important to remember the requirement for any indemnity to be in the public interest. The term "public interest" is not defined. In practice, this requirement will likely involve a consideration of the merits of the proposed project, and the risk of negotiation failing without an indemnity.  

Crown Entities

The Crown Entities Act 2004 (CEA) restricts the types of indemnities that may be given by crown entities. A crown entity is a body established by law in which the Government has a controlling interest. The circumstances where a crown entity is allowed to give an indemnity are those permitted by:

• Regulations made under part 4 of the CEA (CEA Regulations);
• approval given by the entity's responsible Minister and the Minister of Finance;
• any provision in the crown entity's governing Act; and
• an exemption granted in Schedule 1 or 2 of the CEA.

The CEA Regulations allow crown entities to provide an indemnity in a contract for the procurement of services entered into in the ordinary course of operations. Crown entities enter into IT contracts in the ordinary course of operations. This means crown entities are generally free to provide an indemnity in these circumstances.

Conclusion

Indemnities can be contentious because the need for them, and the rules around them, are not fully understood. The general position is that government departments can provide indemnities only in an IT context for IP claims or under standard terms and conditions, but in most situations party-to-party indemnities will not be necessary. Crown entities have wide discretion to provide indemnities.

Key Contact

Don Holborow

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The Anti-Counterfeiting Trade Agreement Hits New Zealand

This month, the New Zealand Government is hosting the eighth round of negotiations for the ACTA - the Anti-Counterfeiting Trade Agreement.  The negotiation process for the ACTA has so far been shrouded in controversy, mainly due to the lack of transparency in the conduct of the negotiations, and leaked documents suggesting that the scope of the treaty goes beyond that originally envisioned. So what is the ACTA all about and why is it making the news?

The ACTA - What is it?

The ACTA is a plurilateral trade agreement that aims to establish an international framework to combat large-scale counterfeiting and piracy. The ACTA hopes to achieve this by three main components:

1. International cooperation;
2. Enforcement practices; and
3. Legal framework for enforcement of intellectual property right laws.

Who is Involved?

The participating countries in the negotiations are Australia, Canada, the European Union, Japan, Korea, Mexico, Morocco, New Zealand, Singapore, Switzerland and the United States. It is hoped that other countries will also sign up to the ACTA once it is finalised.

The Ministry of Economic Development (MED) and the Ministry of Foreign Affairs (MFAT) are negotiating the agreement for New Zealand.

What is the Process?

The participants have held seven rounds of negotiations so far, and hope to finalise the agreement in 2010. The New Zealand public have been invited to make submissions on the ACTA at different stages throughout the negotiations. These can be found on the MED website (www.med.govt.nz).  Wellington, New Zealand is scheduled to host the eighth round of negotiations from 12-16 April 2010. 

Once the text has been finalised, it will then be up to each participating country to decide whether and when to bring the ACTA into force. If New Zealand does accede to the treaty, the Government would need to bring the ACTA into effect by ensuring our laws are consistent with the international enforcement framework imposed under the ACTA. 

Why is the ACTA Hitting the Headlines?

Various draft texts of the ACTA have been leaked on the internet throughout the negotiation process, including most recently a consolidated text of the ACTA on 23 March 2010. This latest leak has led to concern that the ACTA goes beyond large scale counterfeit and piracy issues, including a suggestion that the United States is lobbying for the ACTA to require participating countries to enact a graduated response policy (such as a "three strikes" scheme) requiring internet service providers (ISPs) to terminate the internet connections of users who repeatedly download pirated material. These issues will also be the subject of debate in Wellington this month, as negotiations focus on the Digital Provisions chapter of the ACTA. For this chapter, the MED has asked for public submissions on when third parties such as ISPs should be held liable for infringement online, as well as the availability of safe harbour provisions for ISPs, and when ISPs can disclose infringing users to rights holders. These issues have already been canvassed in depth in New Zealand, leading to the Copyright (Infringing File Sharing) Amendment Bill 2010, due to be enacted later this year.

Given the uncertainty around the possible effect of the ACTA, many interested parties in New Zealand have pushed for the draft text of the ACTA to be released and the participating countries' position on the issues to be made public. MED has stated that it has sought to keep the process as transparent as possible, releasing the agendas, reports and summaries for each round of the negotiations, but it has agreed to keep confidential the actual text of the ACTA and MED's views on the issues involved. MED has also advised that it is standard practice for international treaties to be drafted in confidence, which allows participants the ability to engage in frank and open discussion, and for these reasons, has denied requests for the disclosure of information under the Official Information Act.

In March 2010, the European Union parliament voted overwhelmingly in favour of a resolution that would require the EU Commission (which is the EU's representative in ACTA negotiations), to disclose all information about the ACTA talks to the EU parliament, and to refuse to support any internet disconnection penalty for online copyright infringement. EU parliamentarians have also specifically requested that the issue of transparency is on the agenda for the next round of the ACTA negotiations in New Zealand, and that the outcome of those negotiations is made public.

What Does It Mean For New Zealand?

It is likely that the ACTA will again come under scrutiny this month in Wellington, where negotiations will no doubt be focussed as much on the transparency of the ACTA process as the substance of the proposed text. Despite the controversy, the ACTA is still at too preliminary a stage for realistic analysis of its effect on New Zealand trade mark and copyright laws.

Key Contact

Earl Gray

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 Rural Telecommunications Strategy

 On 16 March 2010, Steven Joyce (the Communications and Information Technology Minister) announced that Cabinet has approved the Government's Rural Telecommunications Strategy, a key part of the Government's strategy to increase New Zealand's global competitiveness. 

The Rural Telecommunications Strategy sets out the Government's proposals to improve the availability and quality of telecommunications services in rural areas. These proposals are detailed in the Ministry of Economic Development's "Rural Broadband Initiative - Proposal for Comment" (RBI Proposal) and "TSO Reform and Funding Telecommunications Development - Proposal for Comment" (TSO Proposal). 

In this article, we look at both of these proposals and the Government's changes and clarifications to them since they were issued in September 2009.

Rural Broadband Initiative (RBI)

Background

In the RBI Proposal, the Government notes that New Zealand is highly dependant on the rural sector for economic growth. While 13.8% of the country's population live in rural areas, in the year ended March 2009 approximately 64% of the country's income from exports came from produce grown in rural areas (from the agriculture, horticulture and forestry sectors). The rural sector is also noted as being crucial to New Zealand's tourism industry.

In contrast, rural broadband speeds are limited.  Poor commercial incentives (due to low population density) have resulted in a history of low investment in the rural telecommunications infrastructure. However, the Government believes that there are clear benefits to rural communities, the rural economy and New Zealand in general in upgrading this infrastructure. 

The Government identifies backhaul (ie the service that transports aggregated data, such as internet traffic from multiple customers, between points on a telecommunications network) as the key constraint on improving rural broadband services.

The RBI complements the Ultra-fast Broadband Initiative (UFBI), which will deploy ultra-fast broadband to 75% of New Zealand's population, by seeking to improve the broadband services available to the 25% of the population living outside of the footprint of the UFBI.

Objectives

The Government's first key objective is to give 97% of all schools, serving 99.7% of all students, access to ultra-fast broadband (ie with speeds of 100Mbps or greater) within 6 years. Alternative solutions will be sought for the remaining schools, which are situated in remote locations, with the objective that the remaining 3% will achieve speeds of at least 10 Mbps.

The Government's second key objective is to leverage off the investment made to schools, and ensure that 97% of households and businesses are able to access broadband services of 5Mbps or more within 10 years. 

The Government wishes to achieve these objectives through progressive infrastructure network upgrades in rural areas.

Funding

The Government has allocated up to $300 million to rural broadband.  This sum is comprised of:

• a direct contribution of $48 million from the Government; and
• the balance, ie up to $252 million, from the proposed Telecommunications Development Levy (TDL) which is to be introduced as part of the reform of the local residential Telecommunications Services Obligations (TSO) (being the obligations of telecommunications service providers under agreements (called TSO instruments) with the Crown to supply services to customers, which would not otherwise be available to customers at an affordable price).

These funds will be supplemented by school, industry and rural community contributions, and will be provided to recipients by way of grants.

In addition to the Government's direct contribution of $48 million, the Government will also make $52 million from the UFBI available during the early years of the RBI if there is a shortfall. This $52 million will be paid back to the UFBI over time. 

Procurement Process

The Government intends to initiate a tender process for the provision of ultra-fast broadband services to schools. It will seek proposals from tenderers on connecting identified regional clusters of rural schools, and connecting all rural schools nationally. 

Proposals will be evaluated by the Government on the basis of certain criteria, including:

• the level of Government subsidy required;
• the projected revenues from schools; and
• the level of anticipated community spill-over benefits.

The Government has said that it does not have a preference for regional or national proposals or for the technology used to deliver the broadband services, and that it will assess proposals on the basis of their relative merits.

TSO Reform

As part of its Rural Telecommunications Strategy, the Government suggests in its TSO Proposal that:

• the TSO is restructured; and
• there be the introduction of the TDL, which would be payable by the telecommunications industry.

Restructuring of TSO

In 2001, the Government and Telecom agreed a Local Service TSO Deed, requiring Telecom to make local telephone services available throughout New Zealand, and not to increase prices for these services in real terms. The intention of the Local Service TSO is to ensure that Telecom makes these services available to rural communities, and at a price and quality that is comparable to the services provided to urban areas.

Telecom currently receives compensation for fulfilling the Local Service TSO requirements through:

• the revenue it receives from local service customers; and
• the TSO charge it receives from the industry, with the cost of subsiding the service being apportioned to other telecommunications service providers on a market share basis.

The Government does not consider that the current arrangements accurately reflect the actual costs and benefits to Telecom across its local service business. The Government proposes that a new TSO charge methodology be used by the Commerce Commission to set TSO charges in the future. 

Telecommunications Development Levy

It is proposed the TDL be introduced to contribute funding for subsidising rural telecommunications facilities, commencing in 2010/2011. The TDL will average $50 million per year for the first 6 years, and then decrease to no more than $10 million per year. There is an overriding principle that the TDL will be no greater than the approximately $70 million per annum currently recovered through TSO levies. 

The TDL will be recovered from telecommunications service providers on the same basis as the current TSO levies (ie based on their respective revenues). The revenue collected by the TDL will be allocated to pay TSO charges (under the existing TSO instruments), make grants to assist the deployment of rural telecommunications infrastructure, and improve the emergency call system. The TDL will be supported by Government subsidies.

Cabinet Approval

Cabinet approval to both the RBI and TSO reform proposals was announced on 16 March 2010. The Government has confirmed that the tender process for the RBI will be split into two stages, firstly an Expression of Interest (EOI) stage and then a Request for Proposals (RFP) stage. The indicative timetable being for the Government to call for EOIs in April, receive EOIs in May, release the RFP in July/August, receive proposals in August/September, and allocate funding to the successful bidders in October/November, 2010.

To implement the TDL, the Government will need to establish a Crown account, governance and administrative arrangements for the TDL fund, and arrangements for the application and collection of the levy.  This will involve amending the Telecommunications Act 2001, with the intention of establishing the TDL from 1 July 2010.

Key Contacts

Karen Ngan
David Alizade

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Australia:  No Copyright in Telephone Directories. What Does This Mean For New Zealand?

The Australian Federal Court has recently considered the question of whether copyright can subsist in the White Pages and Yellow Pages telephone directories (Directories) in Australia. 

In Telstra Corporation Limited v Phone Directories Company Pty Ltd [2010] FCA44 the Court found that the Directories were not "literary works" within the meaning of the Copyright Act 1968 (Cth) (Act) because they did not meet the requirements for "originality" and there was no clear authorship. Therefore, the Court considered that copyright could not subsist in the Directories.

Four Step Test for Directories

The Court identified four steps necessary to determine whether copyright subsisted in the directories (1) Identify the work; (2) Identify the author(s) of the work; (3) Determine when the first publication of the work occurred; and (4) Identify how the work is original.  Step (2) "Authorship" and step (4) "Originality" proved to be the challenge for Telstra.

Authorship

It is essential for all joint authors to be identified in order for copyright to subsist in the Directories. Evidence suggested that hundreds of employees and numerous contractors had contributed to the Directories, however only a portion of these people could actually be identified in the lists and affidavits filed by Telstra. In addition to this, even if all possible authors could be identified, the Court considered that a majority of the creation process for the Directories was heavily automated. On this basis authorship was not established.

Originality

The process by which Telstra compiled the Directories was discussed in some detail in the case and evidence was given by 91 individuals involved. The Court considered that the evidence established that the "system" by which the directories were produced was designed to limit originality, not provide for it, and where the process could be automated it had been. Where it could not be automated, the people working on the Directories were required to act consistently with the "Rules" and all work was subject to a multiplicity of checks to ensure consistency. The "Rules" themselves were not complicated and the tasks performed by the individuals applying the Rules were mechanical in nature.

Ultimately therefore, the Court found that the largely computer generated and otherwise rule-bound processes by which the Directories were compiled meant they lacked the requisite "independent intellectual effort" or "sufficient effort of a literary nature" to be considered original.   

What Does This Mean for New Zealand?

If the New Zealand Courts follow the Australian Courts on this issue, it is very likely that we will need to consider specific legal protection for non-original databases in the future.

The Telstra decision will have particular impact on those companies who compile and produce telephone directories in New Zealand and potentially casts doubt over their ability to gain copyright protection for these directories.

For those businesses involved in compiling databases of a similar nature to a telephone directory, the four step test laid out by the Court in Telstra will provide useful guidance to help ensure that copyright will be held to subsist in their databases.  

Ultimately it may be necessary for New Zealand to enact statutory protection similar that already in place in Europe. Directive 96/9/EC of the European Parliament and Council on the Legal Protection of Databases specifically recognises the fact that some valuable databases will not attract copyright and creates a sui generis right for a "maker" of a database who shows "substantial investment" in obtaining, verifying or presenting its contents to prevent the extraction and/or re-use of the whole or a substantial part of that database.

Key Contacts

Richard Watts
Sonya Hill

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