Rebecca Parry is a professor at Nottingham Law School, Nottingham Trent University, UK, and a member of the CIFL Board of Advisors. This blog piece is a part of the series which features contributions by the members of our Board of Advisors.
The world has changed rapidly in the last few years. The growing use of disruptive technologies has brought great changes to ways of working and interacting socially. The pace of these changes was only accelerated by the Covid-19 pandemic as, although this event brought great strains, it also led to growing use and awareness of the potential of technologies. Technologies enabled safer transactions in the Covid-19 era, supported, for example, by the Indian legal framework permitting electronic transactions in place of existing formalities. There are also prospects for greater social inclusion as the world’s leading digital ID scheme Aadhaar, has enrolled over 1.2 billion people. There are prospects for improvements in educational opportunities and medical and agricultural technologies, to give only a few notable examples. The Indian digital economy is booming and as a result, India stands to be a major global player in the 21st century. The National Association of Software and Services Companies (Nasscom) and McKinsey anticipated in 2015 that the Indian technology services industry might be worth $300-350 billion.
While the technical infrastructure to support this transformation, such as broadband, internet exchange points, and cloud services, is important it is not enough in itself. Other factors, including the role of law in this transformation, should not be underestimated. India’s comparatively well-developed laws have already given it competitive advantages in winning digital service contracts and they should stand entrepreneurs in good stead in the future. It is also notable, however, that new ways of doing things may prompt reflection as to the suitability of laws that were developed in very different contexts. It can be difficult for laws to deal with every development but a broad health check of laws should be an aspect of the development of a digital economy.
Areas of law that are immediately of relevance to digital economies are intellectual property laws, human rights, and privacy laws, as well as competition laws. The UK’s Digital Economy Act 2017, for example, covered a wide range of aspects of the law. While the importance of these areas should not be underemphasised and are vital to ensure that nobody is disadvantaged by the digital economy or, against their will, excluded from it, an overlooked aspect relates to the laws that support businesses. Behind digital services are companies that are often poorly understood or overlooked, despite their importance and this is the case for concepts such as the cloud that many will think of as ethereal. This is an area of the industry that is complex and interconnected and this makes the risks of this sector difficult to assess. At its worst, the insurer Lloyd’s of London has forecast the failure of a digital service company could give rise to a “too big to fail” scenario, given the dependency of businesses and the wider public on the services provided and a crisis could rival that of the banks in 2008. Even if companies that get into difficulties are smaller and do not present systemic risk, they could leave business and customer customers unable to access their data or important services and they can cause significant losses.
Admittedly, many risks can be anticipated by customers in exercising due diligence in selecting digital services and in inserting provisions into their contracts to provide protection, the extent to which this will be helpful in the event of the failure of a business is limited. Attention also needs to be paid therefore to a proactive approach to the possibility of business failure and a suitable approach, therefore, needs to combine:
- A strong emphasis on crisis prevention with approaches that will protect customers in the event of business failure. As well as good corporate governance standards there is a need for compliance with industry best practices, including cybersecurity, staff training, and record-keeping.
- A robust strategy to address the problems arising from the financial difficulties of digital services providers, considered in more detail next.
The biggest challenges will lie in cases where a digital service supplier is insolvent and not a suitable candidate for financial or operational reorganisation. A sudden shutdown of a business, such as a cloud computing service supplier, could leave customers being permanently denied access to data or services that they depend on since data can be time-consuming to recover and alternative services may be hard to come by or may be unavailable. It would therefore be desirable for insolvency laws to enable a temporary period of ongoing trading while customers recover data and make alternative arrangements. Inevitably the costs that this would lead to would present tension with the interests of creditors who will want the insolvency to be swiftly concluded so that further losses can be avoided. This is an example of a scenario where business failure can potentially have a wide public impact and this might justify an impact on creditors. Consideration might therefore be given to the development of a specialist insolvency procedure to support insolvent digital service companies. Existing research by the author has considered this aspect of UK law and the development of an approach in India is the subject of an ongoing research project.