Commercial Review – December 2014
Print newsletter02/12/14

Enforceability of arbitration clauses in consumer contracts
The Court of Justice of the European Union has recently ruled on the approach national […]
The Court of Justice of the European Union has recently ruled on the approach national courts should take when deciding whether an arbitration clause in a contract between a bank and consumer is unfair within the meaning of Article 3(1) of the Directive on unfair terms in consumer contracts [1]. Article 3(1) provides that a contractual term, not individually negotiated, is unfair if it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer. The Directive is implemented into English law by the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations) and Article 3(1) is reflected in Regulation 5(1) of the Regulations.
The leading authority on the subject of the validity of arbitration clauses in consumer contracts under English law is the 2008 High Court judgment in Mylcrist Builders Ltd v Buck [2]. In this case, the claimant builders sought to enforce an arbitration award against a consumer. Their contract had been concluded on standard terms which included an arbitration clause.
Schedule 2 of the Regulations contains an indicative, non-exhaustive list of terms that may be regarded as unfair. Paragraph 1(q) includes terms which have the effect of “excluding or hindering a consumer’s right to take legal action or exercise any other legal remedy particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions…”.
The High Court determined that the Arbitration Act 1996 was not an arbitration “covered by legal provisions” for the purposes of paragraph 1(q) of Schedule 2. This was because that paragraph was referring to cases where, for example, there was a special statutory scheme and did not apply to arbitration generally. The effect of the arbitration clause was to prevent the consumer from having access to the court and caused an imbalance in the parties’ contractual rights and obligations. Accordingly, the term was unfair.
Returning to the case before the European Court, [3] the dispute concerned mortgage contracts which provided for arbitration in the event of dispute. The consumer sought a ruling from the national court that the clause was void and the national court in turn sought a preliminary ruling from the European Court as to whether Article 3(1) should be interpreted as meaning that the arbitration clause was unfair because there was no judicial remedy under national law against the arbitral tribunal’s decision.
The European Court ruled that:
- in cases like this it was for the national court to determine whether the arbitration clause excluded or hindered the consumer’s right to take legal action or to exercise another legal remedy
- the fact that the bank had provided the consumer with information on the differences between litigation and arbitration was not necessarily enough to stop the clause from being unfair.
The European Court’s ruling reinforces the risks for businesses seeking to rely on an arbitration clause in their standard terms for use with consumers. The Court did not say that such terms would always be unfair but there is clearly a strong possibility that they may be.
[1] Council Directive 93/13/EC
[2] [2008] EWHC 2172
[3] Sebestyen (Order of the Court) [2014] EUECJ C-342/13

Get ready for changes to consumer law
The Consumer Protection (Amendment) Regulations 2014 came into force on 1 October 2014. These amend […]
The Consumer Protection (Amendment) Regulations 2014 came into force on 1 October 2014. These amend the Consumer Protection from Unfair Trading Regulations 2008. The 2008 Regulations made it a criminal offence for a trader to use a misleading or aggressive practice where that practice was a significant factor in the consumer entering into the contract. However, whereas under the 2008 Regulations the consumer had to report to Trading Standards, which would then determine whether or not to take the matter further, the 2014 Regulations empower consumers to pursue private remedies against the trader concerned.
The Department for Business, Innovation and Skills (BIS) has published guidance to sit alongside the 2014 Regulations. Part 2 of the guidance sets out the new private remedies available to consumers. These include, in particular, a right to terminate the contract and obtain a refund, or the right to keep the goods or services in issue but to request a discount on the price paid. Consumers will also be able to claim damages for distress and inconvenience and for any consequential financial losses.
Whilst the guidance is of obvious interest to consumers, it is well worth traders taking the time to read it as well. Part 1 of the guidance lists the kind of practice that will trigger the new remedies.
The BIS has also published an update to the progress of the Consumer Rights Bill. The Bill was initially expected to become law this year but is now expected to enter into force on 1 October next year. The BIS intends to publish guidance on the Bill in April with sector-specific guidance to follow in the months between April and implementation. When at last it is implemented the Bill will consolidate consumer rights and remedies in respect of the supply of goods and services and, at the same time, introduce important changes to the existing regime. Business supplying consumers will need to review existing practices and documentation prior to the Bill coming into force. We will provide further updates in 2015.

Product placement opportunities in the UK
Product placement – and the law and regulations governing it – is becoming increasingly important […]
Product placement – and the law and regulations governing it – is becoming increasingly important as the way in which we watch television changes. The ability to record programmes and then fast forward through the adverts or, alternatively, to watch television via an app on a laptop or an “on-demand” service, pose a challenge for traditional television advertising. More and more advertisers are considering the potential of product placement.
Branded (or brand identifiable) product placement on UK television has been permissible since 2011. Viewers had previous exposure to product placement via imported, particularly US material, but until 2011 there was a prohibition on its use in UK-made programmes and films. However, the new regime is a strict one. In contrast to normal televised advertisements that are self-regulated by the Advertising Standards Agency, product placement is regulated by Ofcom, which enjoys statutory powers of enforcement. The regulatory framework is the Ofcom Broadcasting Code (the Code).
The Code provides that product placement cannot take “undue prominence” or take precedence over the editorial needs of the programme, distorting the natural progression of the television show in favour of the advertising vehicle. Broadcasters must maintain editorial independence and control over programme content and scheduling – the tail (product placement) should not be allowed to wag the dog (programme content).
The Code also proscribes a number of products and programme genres that cannot be used for product placement. These include tobacco products (including e-cigarettes), alcoholic drinks, gambling, medicinal products and food or drink that is high in fat, sugar or salt. Programme genres that may not be used for product placement include children’s programmes, news programmes, UK-produced current affairs productions, religious affairs programmes and consumer affairs productions.
Programmes featuring product placement must alert viewers to the fact that product placement is occurring by including a universal neutral logo (a ‘P’ symbol) at the start and end of the programme and when it resumes after a commercial break.
Product placement is still in its infancy in the UK but if, as often happens, the UK follows the US lead, it will soon be big business. In the US, product placement accounts for around 5 per cent of all advertising sales. However, agreements for product placement will need to prepared and reviewed carefully, with, in particular, attention paid to the degree of control afforded to the advertiser over when and how the product appears and the degree of prominence enjoyed by the product. Additional issues will arise for the advertisers where the placement is to appear in a series of programmes over an extended time period, where issues such as adverse publicity, fluctuating viewing figures and change to scheduling, will need to be addressed.

The exercise of contractual discretion in commercial contracts
In the 2013 case of Compass Group (trading as Medirest) v Mid Essex Hospital Services […]
In the 2013 case of Compass Group (trading as Medirest) v Mid Essex Hospital Services NHS Trust [1] the Court of Appeal was asked to consider the obligation of good faith in a commercial contract in the context of the exercise of a contractual discretion.
The case concerned a contract for the provision of hospital catering services pursuant to which the Trust was able to award itself service credits in the form of payment deductions for performance failures. There was also a clause which provided that “the Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust…to derive the full benefit of the Contract”. In assessing this clause, the Court of Appeal held that the Trust’s discretion to award itself payment deductions was not subject to an implied term that the discretion must be exercised in a non-arbitrary manner. Such a term could only be implied where the Trust was required to make an assessment or choose from a range of options taking into account the interests of both parties, rather than having to make a simple decision whether or not to exercise an absolute contractual right.
Some further light on the extent of the duty of good faith in the exercise of a contractual discretion has been shone by the High Court in Andrew Brogden and Robert Reid v Investec Bank PLC [2]. In this case, the claimants worked in a bank. Their employment contracts included a bonus clause and the amount of the bonus was referable to the “Economic Value Added” (EVA) generated by their part of the business. Their employer calculated the EVA as zero. The claimants disputed this and argued that to the extent that the employer had any discretion in relation to the calculation of the EVA, there was a duty to exercise that discretion rationally.
The High Court held that the employer’s discretion to determine the EVA was subject to an implied requirement of good faith and rationality. It explained that where a contract gives responsibility to one party for making an assessment or exercising a judgement on a matter which materially affects the other party’s interests and about which there is ample scope for reasonable differences of view, the decision is properly regarded as a discretion and that such discretion is subject to the implied constraints that it must be exercised in good faith, for proper purposes and not in an arbitrary, capricious or irrational manner.
(On the facts of the case, however, the employer had not exercised its discretion irrationally and there was no evidence of bad faith, so the claimants were unsuccessful.)
There are at least two lessons to draw from these cases. The first concerns the subtle distinction that exists between the situation where the discretion involves a decision as to whether or not to exercise a contractual right (the position in Compass) and the position where the discretion involves choosing from a range of options (the position in Brogden). The second is of the scope for legal argument that can arise where the wording of the contract invokes the exercise of a discretion rather than, as could presumably have been the case, a precise formula. Generally, the more precisely the mechanism for arriving at a decision is drawn, the less scope there should be for subsequent argument.
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[1] [2013] EWCA Civ 200
[2] [2014] EWHC 2785 (Comm)

The parody exception to copyright infringement
New copyright regulations came into force in the UK on 1 October 2014. The regulations […]
New copyright regulations came into force in the UK on 1 October 2014. The regulations have their origins in the Hargreaves Review of Intellectual Property in 2011, which made a number of suggestions as to how the UK’s intellectual property regime could be modernised. One of the changes introduced by the regulations concerns the making of personal copies of copyright works for private use. Another concerns quotation (permissible where the use is “fair dealing”, the extent of the quotation is no more than necessary and is accompanied by sufficient acknowledgement). The final change concerns the use of parody.
The Compact Oxford English Dictionary defines “parody” as “an amusingly exaggerated imitation of the style of a writer, artist, or genre”. Taking that definition, parody is nothing new. Aristotle makes mention of it and even a casual glance at UK eighteenth-century art or literature, for instance, will show a country in which parody was very much part and parcel of public life. However, parody has probably never been as popular as it is today. Twitter is awash with parody accounts (the Kevin Pietersen parody account is a recent infamous example in the UK) and YouTube with spoof videos. Despite this, until 1 October 2014, there was no copyright exception for parody. This point was made in the Hargreaves Review, which said that the rise of video parody and social networking sites justified a new “parody” exception to copyright infringement.
The new exception, which amends section 30 of the Copyright, Designs and Patents Act 1988 (the Act), allows “fair dealing” with a copyright work for the purpose of caricature, parody and pastiche without the permission of the copyright owner. Contractual provisions which purport to exclude this exception will be ineffective. The difficulty with the new legislation will be in identifying whether something is parody – what one person considers parody, another may not, with the judge as ultimate arbiter. This would seem to be fertile ground for litigation.
To understand the scope of the new parody exception, it is important to understand the limits imposed by the concept of “fair dealing”. The Act does not provide much assistance in defining what will/will not constitute fair dealing. The case of Ashdown v Telegraph Group Ltd [1] emphasised the amount and importance of the work taken as a key consideration. Taking an excessive amount, or taking a small amount on a regular basis, can render the dealing unfair. Since in order for parody to be effective, the original work must be recognised, this will usually necessitate the reproduction of a substantial part of the copyright work, with the consequence that in many cases parody will be inherently “unfair dealing”.
In addition to the limitations imposed by the requirement for “fair dealing”, the new parody exception may infringe the owner’s moral right, set out in section 80 of the Act, to object to the derogatory treatment of their work. A treatment is derogatory for these purposes “if it amounts to distortion or mutilation of the work or is otherwise prejudicial to the honour or reputation of the author or director”. A parody will often do just that.
The introduction of the new parody exception is timely as the Court of Justice of the European Union has very recently given a ruling on parody. The case in question [2] concerned Johan Deckmyn of the right-wing Vlaams Belang political party. Deckmyn distributed a calendar including an image adapted from a comic book entitled “De Wilde Weldoener”. In Deckmyn’s version, the mayor of Ghent is shown showering coins on immigrants. The rights holders in the original work instituted copyright proceedings in the Belgian court. Before the Brussels Court of Appeal, Deckmyn argued that the image should fall within the Belgian exception for parody, caricature and pastiche. The Belgian law reflects Article 5(3)(k) of the Information Society Directive [3], which allows Member States to introduce an exception to the reproduction right and the right of communication to the public for the purpose of caricature, parody or pastiche. The Belgian Court referred a number of questions to the European Court.
In its ruling, the European Court held that parody was an autonomous concept of EU law and, as such, must be interpreted uniformly throughout the EU. It held that the criteria for the parody exception were minimal and the only essential characteristics were that it must evoke an existing work while being different from it, and be an expression of humour or mockery. It will be for the national courts to determine whether these threshold requirements are met. The Court also said that regard must be had to the need to strike a fair balance between the rights and interests of the author of the original work and those of the people creating the parody. This calls to mind the “fair dealing” aspect of the exception in English law, just as the Court’s observation that the national court must determine whether the rights holder has a legitimate interest in ensuring his work is not associated with a discriminatory message is not a long way from the “moral right” in section 80 of the Act.
The European Court has given a low threshold to parody but the elephant in the room is the subjective test for whether something is humorous. What is amusing to a judge in one EU Member State may be met with a blank expression or sour grimace by a judge in another Member State, or even by the judge sitting next to him.
Taken together, the change to the Act and the judgment of the European Court provide a welcome recognition of the importance of parody in the modern world and have made important progress in bringing copyright laws up to date in this respect.
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[1] [2002] Ch 149
[2] Case C-201/13
[3] 2001/29/EC