Hello and welcome once again to The Pinsent Masons Podcast, where we try to keep you abreast of the most important developments in global business law, every second Tuesday.
Today we’ll look at the impact of a wide-ranging new EU directive that demands that companies assess and reduce their damaging impact on the environment and human rights, and find out that it affects many more companies than you might think; and we examine the UK’s new law governing self-driving cars and ask: will it set the standard for the rest of the world? But first, some business law news from around the world:
EU AI act passes last legislative hurdle.
New Hong Kong law will affect how construction companies are paid and
the UK enters the pre election period.
European Union ministers have approved the EU’s artificial intelligence Act, which will now become law within weeks but may not take effect for two years. The AI law is wide ranging and governs how EU countries should regulate and control the use of AI systems based on their level of risk, including banning some uses of the technology. It also seeks to control the development of the systems so that users are clear about the nature of the technology they are using and the data underpinning it.
A proposed new law in the Hong Kong Special Administrative Region will make construction companies pay their suppliers even if they haven’t themselves been paid yet, preventing the use of ‘pay when paid’ clauses in contracts. The Bill, which will be read by the Legislative Council this week, aims to increase the speed of payments and put in place new mechanisms to resolve disputes. Construction law expert Bernard Ang said that the bill would “truly change the construction contracting landscape…and will require wholesale amendments to construction contracts and lead to a re-allocation of risks in many instances”.
A general election has been called in the UK, meaning that relations between companies and the government will change in the run up to the vote on 4 July. During the pre-election period the government will avoid major decisions. Though companies are not directly affected by the rules, it could have an impact on some of their activities. Public law expert David Thorneloe explained:
David Thorneloe: What government departments can't do is take major decisions that are not time sensitive, things that essentially could wait for six weeks until after the election. These may be matters that a new government or the same government might take a different view on after the election, so whilst those rules don't apply directly to businesses, if businesses are engaging with public bodies or government departments they may find that they are limited in what they can do because of that guidance. It may be a major contract that is quite business as usual and it's not politically sensitive that might go ahead, but if it is something that has a little bit more sensitivity or it's a major public spending decision, then there is a good chance that those decisions will simply be deferred until the election has run its course.
A major piece of legislation was passed in the European Parliament last month that will have far-reaching implications for the way all large companies in the EU conduct themselves, and will have knock-on effects on smaller companies and those outside the EU. The Corporate Sustainability Due Diligence Directive, or CS triple D, creates an obligation on large companies to make sure their own activities and those of their suppliers don’t harm the environment or breach people’s human rights. It is wide in scope, broad in its reach and comprehensive in the impact it will have on businesses. Birmingham-based commercial and supply chain specialist Laury Ayre told me why the law is being introduced.
Laura Ayre: Its main focus is essentially to require large companies, EU companies, to identify, minimise and essentially prevent wherever possible potential environmental and human rights damage or harm caused by their own activities, as well as those of their subsidiaries and their what they call their value chain partners. So, for you or I, the actual supply chain, whether that's your supply chain upstream, your supply chain downstream and what they're looking to do is make sure that those companies have really robust sustainability processes in place and comply with rigorous due diligence requirements.
Matthew Magee: The law will apply to large companies, those with over 1000 employees and global turnover of €450 million or more. But the way it's been created means that its power will be felt across the global economy, because companies must make sure that other companies they hire don't breach the laws. Its effect will then stretch to smaller companies and to those not based in the EU at all.
Laura: I think it's really important to understand that even if you're not a company that's based in the EU and you don't meet the minimum requirements of the number of employees or the turnover, I think it's fair to say that the extent to which any of those companies that are directly caught for within your supply chain, for example, you actually want to supply to some of these businesses and be caught, I think it's very fair to assume that they will seek to flow down all of these requirements to you as one of their suppliers, and therefore it's critical that businesses, whether it's based within the EU or in the UK, are fully on board with what the requirements are to ensure you give yourselves the best chance to be successful in tender processes etcetera, and provide your supply chain with the confidence that you have the correct sustainability and due diligence process in place yourself.
Matthew: The law is designed to make sure companies are behaving with respect for people and places which to some extent you hope is happening anyway. But even for those already operating in line with best practises, change is coming.
Laura: You would hope that businesses are simply implementing best practise, but what they will need to do is have evidence of the scrutiny they've carried out in their due diligence. They will need to ensure that their policies around environmental impacts and human rights impacts are very clear and updated very frequently. They'll need to ensure that their contracts and their tendering processes are aligned with this directive so that they can evidence that they have taken all the steps required of them and they can document that and show to the supervising authorities that they have complied with the directive. I think this will entail a lot more data management and making sure that they have really robust procedures in place that are auditable and that are transparent.
Matthew: The rules will probably take effect in the middle of 2029. So, what should companies be doing now to prepare for these changes?
Laura: So, whilst the implementation dates are still some way off, we are advising clients to ensure that they get their heads around this now, they understand whether they're actually in scope to start with and they understand the implications of the directive in some more detail. This is more on the ground procurement teams, legal teams, making sure that the suppliers that they're using are fully robust and this is very specific in the context of looking at human rights issues, environmental issues and ensuring that your business processes are set up to deal with that to ensure you wherever possible prevent these issues, but obviously in the first place identify and seek to minimise them and that can be done then through ensuring that you have your policies in place, your transition plans in place and also ensuring you have the right level of resourcing, because I think it's fair to say that there'll be a big requirement for businesses to make sure they have the resources available to comply. This is not a quick fix overnight.
Matthew: The impact will not be felt evenly. Laura thinks that vehicle makers and people making consumer goods and food will feel the greatest effect. But for those worried about the scale of change, there is some good news. Doing this now will help meet other future regulatory obligations.
Laura: I think a lot of businesses are seeing this is another thing they need to comply with. There is a what we're calling a maelstrom of regulation in this ESG space and this is yet another thing that they need to try and comply with but what we're trying to do is not scare monger businesses. This is all doable and businesses should to be really thinking about how this is best practice and actually if they can comply with the directive this is like to be the gold standard and therefore if they can meet those standards, they're likely to be ahead of the game in terms of other regulation, whether that is, for example, you know, the EU Batteries Directive or other requirements in the context of environmental regulation.
Like lots of countries, the UK has said it wants to be a leader in the development and use of autonomous vehicles. It took a big step forward last month when it passed a law that will govern how self driving cars can be used and who is to blame when incidents happen. It’s not the first self-driving car law in the world, but it is an early one and meets some of the legislative challenges head on, defining lots of terms that will be crucial in regulating their use and assigning liability when things go wrong – concepts such as what ‘autonomous’ means and what ‘safe’ means for self-driving car laws. Birmingham-based automotive law expert Leo Parkington outlined first of all what the new law does.
Leo Parkington: The legislation is the first major step in towards having automated vehicles on our roads and the government wants to do that by 2026. The main thing to understand is it's really a framework, so it sets out core concepts and principles against which the Department for Transport now has to sort of pass a huge array of secondary legislation and regulations that sort of fill in the details. So, I mean the key thing it does is it sets up an authorization regime for the Department of Transport so it introduces a number of sort of core concepts. So what is an autonomous vehicle? What does safe look like on our roads? All these kind of difficult questions have been answered in the legislation, and the most interesting section probably for most people, will be the fact that it establishes and sets out a sort of criminal liability regime for autonomous vehicles and for the first time, sort of puts some liability on autonomous technology on UK roads.
Matthew: There are two big questions a self-driving car law needs to address: firstly what is meant by self-driving: given the many ways in which these machines can be used, when exactly is a person in control and when is the machine in control? And secondly, based on that, who is to blame when things go wrong. The new law, which applies in Scotland, Wales and England but not Northern Ireland, does not shirk from those questions.
Leo: The liability picture if we imagine there's been a crash or there's been some sort of traffic infraction or breach of some sort of road traffic act in the UK, the first question that the legislation would ask is whether it's a user in charge or a no user in charge journey and what that means is essentially is there's someone in the vehicle to take control if necessary. If it's a no user in charge journey, then that's fairly simple. That means there is no one in the car and in the autonomous vehicle is sort of by default going to be liable for whatever might have occurred. If it's a user in charge journey, then the position is a little bit more nuanced so, the question is whether the user in charge was in control and someone that’s in charge of a vehicle may not be in control of it because the autonomous technology might be in control and the legislation introduces some new concepts in relation to this for the first time. So, one of the key concepts is a what's called a transition demand and that is where the autonomous vehicle issues a demand for the person in the vehicle to take control within a certain amount of time and then after an accident has occurred or a breach of traffic laws has occurred, what would be really important is the data in the vehicle which will be able to tell you who was in control, whether transition demand had been issued, whether it had been answered and essentially who is liable for whatever has occurred.
Matthew: So, the people making the systems will be liable for risks – up to and including deaths – caused on the roads if it is a ‘no user in charge’ situation. This has huge implications for two kinds of companies in particular – companies that make the vehicles, and companies that make the self-driving systems. So how will they work out which of them carries that liability?
Leo: Car makers or the tech companies that they team up with will be liable for criminal liability for potentially in the worst case scenarios or deaths on the road. The legislation sets out a principle of authorised self-driving entity, and that is the entity that the person, the regulated body putting this vehicle on the road says is liable. So, in practise that might be your car maker, your OEM, but it might also be your tech company that they've teamed up with that is responsible for the autonomous technology. I anticipate that they will have numerous indemnities and deals between themselves to sort of apportion that risk in the background, but for the purposes of whoever has been sort of a the unfortunate victim of a traffic infraction then that authorised self-driving entity will be the sort of party issue responsible.
Matthew: Leo says the UK is genuinely taking a legislative lead here, and that being early means that the standards set out in this law will be likely to have influence on laws all around the world.
Leo: So, the government is really committed to making the UK sort of one of the hubs for this technology and as a result, we are fairly early in passing these kind of laws and certainly of this comprehensive piece of legislation. This is probably one of the more comprehensive frameworks that are in the world right now. There's certainly some core concepts in here. You know, it sets out the definition of what autonomous means, it sets out a different definition of what safe means, and those concepts might be copied from other country by other countries. Generally the detail is still yet to come in the regulations and secondary legislation needs to be passed, so it's probably a bit early to say if the framework will fits together perfectly yet. But yeah, there certainly some cool concepts in there that are useful and innovative.
Matthew: UK government department the Department for Transport has to fill in a lot of blanks here. The law is just a framework and can’t work without a lot of regulation being developed, consulted on and adopted, which will happen over the next two years. So, Leo said we shouldn't expect roads to be suddenly flooded with fully autonomous vehicles as soon as the law passes in 2026.
Leo: At the moment we have the sort of core concepts for the legislation. What does safe mean, what is an autonomous vehicle? In the next two years, the Department of Transport will be really setting that out in more detail and sort of setting out the authorisation regime and starting to actually authorise autonomous features for cars on UK roads. It will probably be a few years until we actually start to see those and that will be sort of when you really see these cars effectively driving themselves, probably with someone in the front seat, but someone in the front not necessarily with their hands on the wheel taking as much focus as you might see now in sort of a Tesla or sort of a vehicle that sort of does currently have some automated features at the lower level.
Matthew: Thanks for listening to The Pinsent Masons podcast. I hope you enjoyed it. I hope you find time to share it with colleagues and friends and to like and subscribe wherever you get your podcast. Don't forget if you sign up at pinsentmasons.com/newsletter, you can get a tailored weekly digest of the most important business law, news and analysis every week. Thanks for spending time with us and until next time goodbye. The Pinsent Masons podcast was produced by Matthew Magee for international professional services firm Pinsent Masons.
