Supreme Court Confirms Document Means What It Says

I have to say it makes a refreshing change to read a report of a case where the court upholds an unjust result.  Judges quite rightly seek to do justice in the cases that come before them when it is open to them to do so, but sometimes the principles of freedom of contract and commercial certainty mean that when a party has made a bad bargain, he will be held to it.

That was what happened in Arnold v Britton & others [2015] UKSC 36.  91 long leases were granted of chalets in a holiday park on the Gower Peninsula in South Wales, 25 of which contained a service charge provision in the following terms (with minor variations):

"To pay to the Lessor without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year or part thereof."

21 of such leases were granted between 1977 and 1991.  The other 70 leases had been granted between 1974 and 1977 and provided for the service charge to increase by 10% every 3 years rather than every 1 year.  4 of those 70 were then varied between 1988 and 2002 to provide for the yearly rather than 3 yearly increases.  Because of the compounding effect of the wording over the 99 year term of the leases, by expiry of all the leases in 2072 those with yearly increases would be paying over £550,000 per year by way of service charge, whilst those with 3 yearly increases would be paying about £1,900 per year.

The Lessees with the leases providing for yearly service charge increases therefore sought to challenge the service charge clause in the courts.  The County Court judge decided in their favour, interpreting the clause as meaning they had to pay a "proportionate part" of the costs to the Lessor, capped by the formula in the second part of the clause.  On appeal, the High Court judge, the Court of Appeal and the Supreme Court (by a 4 to 1 majority) all decided that the meaning of the clause was clear: that the Lessees had to pay a fixed service charge of £90 compounding by 10% yearly.  Only Lord Carnwarth in the Supreme Court disagreed, preferring the County Court judge's interpretation.

Lord Neuberger, giving the leading judgement in the Supreme Court, was clear that where the natural meaning of the words used by the parties was clear, there was no room for the court to depart from them by reference to principles such as commercial common sense: "while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party."

He also pointed out that the purpose of a fixed service charge clause was to provide certainty and avoid arguments over the lessor's actual expenditure and its reasonableness, and that inflation had been running at well over 10% per annum between 1974 and 1981, and over 15% per annum for six of those eight years; although it was less than 10% per annum after 1981.  In other words, although it was ill-advised for the then lessees to have entered into leases in such terms, it was understandable in the circumstances of the time.

The Lessor had also (perhaps wisely) indicated that she was prepared to renegotiate the 25 leases to a formula linked to the Consumer Price Inflation index, so a just result may ultimately be achieved.

It is good to be able to advise clients that the clear words of their contracts will be enforced by the courts if necessary.  The tricky bit, of course, is knowing when the words are clear.  8 out of 10 learned judges thought they were perfectly clear in this case, but 2 thought they were sufficiently unclear to permit an alternative interpretation.  Does that mean they were only 80% clear?

"Parking Charge" not a Penalty

Most motorists are no doubt outraged by the high charges car park operators make if you have overstayed your parking time, even by a minute.  Nowadays these charges are enforced by cameras with automatic number plate recognition, so are not easily avoided.  But can you challenge them if the car park operator takes you to court?

We now have a case on the subject.  In Parkingeye Ltd v Beavis [2015] EWCA Civ 402 the Court of Appeal considered an appeal by Mr. Beavis against a “Parking Charge” of £85 made by Parking Eye when he overstayed the 2 hours permitted period of free parking in the car park at the Riverside Retail Park in Chelmsford by nearly an hour.  About 20 signs were prominently displayed at the car park.  According to the judgment “The signs are worded as follows (the words I have underlined being especially large and prominent, and the words I have italicised being in small print but still legible if one wished to read them)

Parking Eye car park management

2 hour max stay

. . .

Failure to comply . . . will result in Parking Charge of £85

. . .

Parking Eye Ltd is solely engaged to provide a traffic space maximisation scheme. We are not responsible for the car park surface, other motor vehicles, damage or loss to or from motor vehicles or user's safety. The parking regulations for this car park apply 24 hours a day, all year round, irrespective of the site opening hours. Parking is at the absolute discretion of the site. By parking within the car park, motorists agree to comply with the car park regulations. Should a motorist fail to comply with the car park regulations, the motorist accepts that they are liable to pay a Parking Charge and that their name and address will be requested from the DVLA.

Parking charge Information: A reduction of the Parking Charge is available for a period, as detailed in the Parking Charge Notice. The reduced amount payable will not exceed £75, and the overall amount will not exceed £150 prior to any court action, after which additional costs will be incurred.

This car park is private property."

It was not disputed that the signs were reasonably large, prominent and legible, so that any reasonable user of the car park would be aware of their existence and nature and would have a fair opportunity to read them if they wished, nor that this gave rise to a contract between Mr. Beavis and Parking Eye.

Mr. Beavis challenged the £85 parking charge as being:

1. unenforceable as a penalty at common law; and
2. unfair and therefore unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations 1999.

He lost before the judge at first instance, and obviously felt strongly enough about the issue to appeal to the Court of Appeal.  The Consumers’ Association intervened in the case, so must also have felt the issues were of importance to consumers.

At first sight, one would have thought this was obviously a penalty, as it was not a genuine pre-estimate of Parking Eye’s loss (they being simply contracted to manage the free parking facility for the benefit of shoppers) and was clearly intended as a deterrent.  However, the Court of Appeal reviewed the case law on the subject, culminating in the recent case of El Madkessi (which is still under appeal to the Supreme Court) and noted that “The modern approach to penalty clauses suggested that a clause might not be a penalty, even though it did not contain a genuine pre-estimate of loss, if its dominant purpose was not to deter breach and the fact that there was a good commercial justification for it might lead to the conclusion that that was not the case. The clause would be a penalty only if the sum stipulated was extravagant and unconscionable.”

Here the provision of a 2 hour free parking facility for the benefit of shoppers and the need to keep the car park from becoming full, the fact that the charge needed to be sufficient to cover the costs of enforcement and was in line with the charges made by local authorities all amounted to commercial justification.  The Protection of Freedoms Act 2012 also allowed the recovery of parking charges of this nature that had clearly been brought to the attention of motorists.  In these circumstances £85 was not considered extravagant and unconscionable by the Court, and the charge was therefore held not to be a penalty.

The list of potentially unfair terms in the 1999 Regulations includes “terms which have the effect of requiring a consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation”. The parking charge would have been unfair if Parking Eye had “acted contrary to the requirements of good faith” in imposing it and if “that term caused a significant imbalance in the parties' rights and obligations under the contract to the detriment of the motorist”.  Given that the signs were prominently displayed, the Court held there was no lack of good faith, and the same factors as led to the clause not being a penalty were sufficient for there to be no such significant imbalance.

Mr. Beavis therefore had to pay his £85 parking charge, plus presumably rather more in legal fees.  It would only have cost him £50 if he had taken advantage of the discount for prompt payment.

So we now know that a “parking charge” of about £85 is likely to be recoverable, at least if the notices drawing it to motorists’ attention are sufficiently prominent and clearly worded.  Presumably there must come a point at which such a charge is so clearly in excess of the industry norm (as charged by local authorities and others, and which no doubt will increase over time) as to be “extravagant and unconscionable” but we do not yet know what that point would be and it would take a brave (or really outraged) motorist to test it again before the courts.

Update: on 4 November 2015 the Supreme Court gave judgment in the joined appeals in Cavendish v El Makdessi and ParkingEye v Beavis, deciding that the clauses in both cases were not penalties, and therefore allowing the appeal in the former and dismissing Mr. Beavis' appeal against the Court of Appeal decision discussed above.

Has Data Protection just got more teeth?

The recent Court of Appeal case of Google Inc v Vidal-Hall & Others made some important decisions on data protection issues.  But how much difference will they actually make in practice?

The case arose out of Google's "Safari workaround". Apple's Safari web browser was supposed to block cookies by default, unless the user opted to accept them. However Google exploited a loophole to enable its DoubleClick Cookie to circumvent this and track Safari users' browsing behaviour in order to deliver targeted advertisements. Google did not make its Opt Out Cookie available to Safari users with Browsers, and publicly stated that because Safari was set by default to block third party cookies, the default privacy settings would have the same effect as the Opt Out Cookie if the user didn't change them. Following the discovery of Google's Safari workaround, three aggrieved Apple users who obviously valued their privacy brought this case in the English courts and sought permission to serve proceedings on Google in California.

Google objected to the jurisdiction of the English courts, and this case therefore concerned preliminary issues as to whether the claimants would be allowed to pursue their case against Google. The case has not been finally decided.

The data protection points that were decided by the Court of Appeal were:

1. The claimants could claim damages for the distress they had suffered without having to show any pecuniary loss.
2. There was a serious issue to be tried as to whether the browser-generated information ("BGI") was personal data, even though it did not identify the users by name.

Point 1 is important as it potentially gives some real teeth to the Data Protection Act.  The Act can be enforced by the UK Information Commissioner taking action against the offending data controller or by the affected data subjects claiming damages direct under section 13 of the Data Protection Act 1998.  Whilst the Information Commissioner an impose serious penalties, his is a public office with limited resources which realistically will concentrate on the most serious offenders.  The data subjects could number many thousands, and if they could all bring claims for a data breach (perhaps by a class action or if the claims farmers get involved) this could be a serious potential liability for a data controller in terms of damages and legal costs.

The problem with such claims is that the data users often do not suffer any financial loss.  The real damage they suffer is distress due to the invasion of their privacy.  But section 13(2) of the Data Protection Act provides that in order to claim damages for distress the claimant must also have suffered "damage by reason of the contravention" or the data processing must have been for one of the "special purposes" (being journalism, artistic or literary purposes).  The Google claimants were not seeking any damages for financial loss and the special purposes did not apply.

The Court of Appeal decided to invoke Article 47 of the Charter of Fundamental Rights of the European Union (the right to an effective remedy and a fair trial) in order to "disapply" Section 13(2) because it denied the claimants an effective remedy for the breach of their rights under Articles 7 (the right to respect of private and family life, home and communications) and 8 (the right to the protection of personal data).  The claimants were therefore free to pursue claims for damages for distress alone.

Whilst this is a significant development (and shows the primacy of EU over domestic law, at least where fundamental rights are concerned), it doesn't make that much difference in practice, as the courts had previously applied their own "workaround" to s13(2) by first awarding nominal damages of £1 and using that to ground a claim for distress under s13(2) - as the cases cited in the judgment demonstrate.  The real difference in my opinion is the publicity this high profile case may give to the possibility of distress claims being made.  Companies that previously took a relaxed attitude to their use of cookies may now wake up to the potential liabilities they may incur, and aggrieved users may be more willing to "have a go" at them.  However damages for distress are still likely to be modest (a few hundred pounds is more likely than thousands), so the costs of pursuing claims will still be a significant deterrent to most claimants.

Point 2 is important as it goes to the very issue of what is "personal data".  Many websites and apps track users' behaviour in order to deliver their service or provide more personalised results, and they are not always explicit about obtaining their users' informed consent as to what is going on behind the scenes.  Section 1 of the Data Protection Act defines personal data as relating to an individual who can either (a) be identified from the data itself or (b) is "identifiable" from the data and other information which is in the possession of, or is likely to come into the possession of the data controller.  The Court of Appeal emphasised that a person does not have to be identified by name - there may be other "identifiers" that single out the individual and distinguish them from others.  Nor did it make any difference that Google did not actually identify the users by putting the data together with other information in its possession (e.g. gmail accounts).  But the Court did not make a final decision on these points.  All it decided were that these issues were "not clear-cut or straightforward" in relation to the BGI in the case, and that the matter should therefore proceed to a trial.  We must therefore wait for the final decision (assuming it is not settled beforehand or appealed afterwards) for more guidance on this issue.  However the judgment does give a clear indication that, however the law may apply in this particular case, "identified" and "identifiable" do not just mean by name.  The providers of websites and apps should bear this in mind - especially given that claims for breach may now have more teeth.

Consumer Rights re Digital Content

It has long been a tricky legal question whether software counts as "goods" or "services".  The distinction matters for a number of purposes, including that different terms are implied by law in contracts for the supply of goods and contracts for the supply of services.

The new Consumer Rights Act 2015 (the "Act") sidesteps the question by creating an entirely new category of "digital content" and stating exactly what terms are implied into a contract for the supply of digital content.  However, the Act only applies to a contract between a "trader" and a "consumer"and the key terms are only implied if the consumer pays for the digital content.  So for business to business ("B2B") contracts or contracts for genuinely free content, the old law still applies.  But where the Act does apply, businesses will need to review their terms and conditions.

The relevant provisions of the Act are expected to come into force on 1 October 2015 and there is some excellent guidance produced by the Trading Standards Institute here, which I will not repeat in detail.

In summary "digital content" is widely defined as "data which are produced and supplied in digital form", which the guidance explains includes:

• computer games
• virtual items purchased within computer games
• television programmes
• films
• books
• computer software
• mobile phone apps
• systems software for operating goods - for example, domestic appliances, toys, motor vehicles, etc.

There are implied terms that the digital content must be:

• of satisfactory quality
• fit for a particular purpose
• as described

These terms are subject to some limitations, which are explained in the guidance.  The consumer's remedies for breach of these terms are initially the right to repair or replacement, and then the right to a price reduction if this is not practical.

The trader cannot contract out of these implied terms.  This all sounds like a big change, but the reality is that the scope to contract out of liability to consumers is already severely limited by the Unfair Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999, and the sort of digital content covered would probably have been considered "goods" under the existing law and therefore subject to equivalent implied terms and remedies in any event.  The Act therefore really just clarifies the legal position - which is important as it helps prevent unscrupulous traders taking advantage of the legal "grey area" to deny consumers their rights and deter them from seeking a remedy.

Standard terms and conditions for business to consumer ("B2C") contracts will need to be reviewed for consistency with the new law, especially if it was assumed that the terms implied in a contract for the sale of goods did not apply.  If one of the exceptions or limitations described in the guidance are applicable, it would be helpful to spell this out.  For example the guidance explains that "Most computer systems' software, games and apps have minor defects that are corrected over time with fixes or upgrades. Therefore a 'reasonable person' might expect the defects to be present and judge any items containing them to be of satisfactory quality."  This is something that suppliers may well wish to highlight in their Ts & Cs.

There is more scope for excluding liability in a B2B contract, but standard terms must still satisfy the test of "reasonableness" under the Unfair Terms Act 1977.  Will a statement that no term shall be implied as to satisfactory quality, fitness for purpose or correspondence with description be considered "reasonable" by a Court given that such terms are now clearly implied in consumer contracts, or will a more nuanced approach to the drafting be more likely to be upheld?

Consideration of (and for) Restrictive Covenants

The case of Re-Use Collections Ltd v Sendall & Anor [2014] EWHC 3852 is another illustration of the difficulties in enforcing restrictive covenants in a contract of employment.  The former employee was found on the facts to have been involved in a competing glass-recycling business, which he had been involved in setting up before he left.  There were post-termination restrictive covenants in his contract prohibiting him for 6 months from working for specified companies, soliciting or dealing with clients or soliciting senior employees and for 12 months from setting up a competing business.  The judge held this was too long; 3 months rather than 6 months was all that would have been reasonable, and there was no basis for the 12 month restriction on setting up post termination.

This is all pretty standard stuff, but the interesting point in this case was that the restrictive covenants were in a new contract of employment, which had (for once) actually been signed by the employee, but on 22 February 2013 (after having been with the business since 1980), and were held to be unenforceable for lack of consideration.  Arguments by the employer's counsel that there was sufficient consideration in the other provisions of the contract failed, as they essentially restated the employee's existing terms and no increased benefits or salary increase were proved.  Nor was it sufficient consideration that the employer had continued to employ Mr Sendall on these terms, as there was no real threat he would have been dismissed if he had not signed the contract.

If you are an employer, alarm bells should be ringing by now.  It is a common practice to sign senior employees up to written contracts of employment with restrictive covenants after they have started working - often some considerable time afterwards.  Typically such contracts simply record in writing the existing terms of employment, and in reality they add provisions which the employer has been advised are appropriate, such as restrictive covenants, confidentiality (which also failed in this case for lack of consideration) and ownership of intellectual property.  It is unusual for any specific payment to be made by the employer for such provisions and itemised as consideration for them.  On the basis of this decision, all such provisions must be considered to be at risk.

The simple solution is to execute the contract of employment as a deed (so no consideration is legally required) or put such provisions in a separate, US-style "unfair competition agreement" which would be executed as a deed.  Most employers are unlikely to be willing to agree to pay substantial amounts for such covenants, and providing for nominal consideration of £1, receipt of which is acknowledged but in reality is not paid, risks being held a sham.

In Re-use v Sendall, Mr Sendall was in fact caught by his implied duty of fidelity and good faith, which he was found in breach of by his involvement in setting up the competing business before he left, and was held liable to pay £51k of damages (as against some £747k claimed by Re-use).  This is a liability arising out of the employment relationship, which did not depend on the written contract of employment.  Although Re-use were able (despite some self-serving evidence) to establish it on the facts in this case, it has its limitations (in particular not applying after the termination of the employment), which is why express restrictive covenants are always advisable.  If you can establish consideration for them that is.

Russel Rabbit Fails to Reign Supreme

As well as featuring some amusing fictional animals, the recent trade mark case of Supreme Petfoods Ltd v Henry Bell & Co (Grantham) Ltd [2015] EWHC 256 (Ch) includes some useful lessons for brand owners about the scope of trade mark protection (or lack thereof).

Supreme Petfoods produced a muesli rabbit food under the name "Russel Rabbit" together with a range of species-specific muesli petfoods under the names "Gerty Guinea Pig", "Harry Hamster", "Charlie Chincilla", "Reggie Rat", "Frankie Ferret" and "Gerri Gerbil".  These are all distinctive brands, which the evidence showed had a degree of customer recognition - at least for their "Russel Rabbit" flagship product.  However the UK and European Community registered trade marks which they were seeking to enforce were for the word "SUPREME" and logos consisting of a stylised word "Supreme" and a ribbon device featuring the stylised word (which can just be seen at the top left of the packaging below, beneath the cartoon Russel Rabbit).

Henry Bell also produced a range of small animal feeds, including "Mr Johnson's Supreme Rabbit Mix", the latest packaging for which was like this:

Supreme Petfoods objected to Henry Bell's use of the word "Supreme" on this packaging and on their revamped "Supreme" range of feeds.

The original Mr Johnson's range, which had been acquired by Henry Bell, included such products as "Amos Hamster Mix", "Gloria Guinea Pig Mix" and "Rupert Rat Mixture", but sadly these plucky animals played no further part in the proceedings, and did not go into battle against Harry Hamster, Gerty Guinea Pig and the others.

The first lesson from this case is that descriptive trade marks are not a good idea.  You are not supposed to be able to register trade marks that are descriptive of the goods and services on which they are to be used, as this would give you an unfair monopoly of such terms.  Supreme Petfoods had somehow managed to get away with registering the word "Supreme" as a trade mark despite its being descriptive or laudatory (as Mr Justice Arnold put it) of the goods.  But there was considerable evidence of the word being widely used in a descriptive fashion in the petfood sector (35 examples are listed in the judgment) and Arnold J. therefore declared the word and stylised word marks invalid for lack of distinctiveness, except in respect of small animal feeds - for which he found they had "acquired a slender degree of distinctive character" through use.  A trade mark can still be declared invalid after it has been registered, and it's a valid tactic for an alleged infringer to counterattack by counterclaiming for invalidity.

The second lesson is that even if you can register your descriptive trade mark in the form of a fancy logo, it still won't do you much good.  The ribbon marks were declared valid, but Supreme still had to establish infringement, and Henry Bell weren't using the word "Supreme" on a ribbon.

The third lesson is that infringement is not as straightforward an issue as clients often seem to think.  Supreme had survived the invalidity challenge to their word and stylised word marks in respect of small animal feeds, which was what Henry Bell were using the word "Supreme" to describe.  But the law on infringement is not straightforward (as Arnold J's detailed analysis of the case law of the Court of Justice of the European Union demonstrates).  The main reason Henry Bell were held not to be infringing in this case was that their use of the word "Supreme" was not as a trade mark (i.e. for the purpose of distinguishing its goods), but was purely descriptive.  This demonstrates another problem with descriptive marks.  Even if you can manage to register them, and survive an invalidity challenge, you may still not be able to stop a competitor using them if they do so descriptively.

The final lesson is that trade mark disputes can be complex and therefore costly.  You therefore do not want to get into a serious dispute that will go to Court unless you really need to do so to protect your brand and are sure of your ground.  To conclude with Arnold J.'s opening remarks: “It ought to be possible for such a dispute to be resolved without great legal difficulty or expense. Such is the current state of European trade mark law, however, that instead it has thrown up a considerable number of legal and factual issues […]. As a result, I fear that the costs will have been out of all proportion to what is at stake.”

People with Significant Control - Are We Really Going to Find Out Who They Are?

In my last post I looked at some ways in which the Small Business, Enterprise and Employment Bill attempted to remove some of the red tape involved in running a company.  In this post I look at some new red tape it will introduce when and if enacted in its present form.

Clause 81 and Schedule 3 of the Bill insert new provisions in the Companies Act 2006 aimed at making companies disclose their beneficial owners, which the Bill calls "people with significant control" or (as they will no doubt become known) "PSCs".  A PSC is essentially anyone with a shareholding of over 25% in the company, the right to appoint or remove a majority of its directors, or who "has the right to exercise, or actually exercises, significant influence or control over" the company (to be determined with the help of guidance to be published by the Secretary of State - but this sounds a lot like a "shadow director").

These are essentially the classes of people required to be identified for anti-money laundering compliance purposes, so it should make my job a lot easier filling in customer due diligence forms if I can just look up a new client company's PSCs on the public register accessible via Companies House Direct.  Banks will no doubt make a meal of it and introduce additional compliance procedures before companies can open an account with them, rather than this simplifying the process.

From the company's point of view, it creates a new statutory register of PSCs they will need to create and keep in their statutory books, or they can elect to keep it online at Companies House as one of the registers that can be kept in this way (as mentioned in my last post).  If they keep their own register, they will still need to file particulars at Companies House and confirm them annually in their confirmation statement (aka annual return), in much the same way as if the PSCs were directors.

Some companies may not know who their PSCs actually are, particularly if their shareholdings are held indirectly through nominees.  The Bill therefore gives them power to require disclosure, as public companies have at present, the sanction for non-compliance being service of a "restrictions notice", the effect of which is to suspend voting rights, dividends and the ability to transfer the shares.

Failure to comply with any of this by the company, its officers or the shareholders or PSCs affected is a criminal offence.

On the current timetable, companies will have to start keeping their own PSC registers from January 2016, but will not need to file it until April 2016.  This I suppose is to give them time to serve disclosure notices and receive and collate the replies.  Companies House will also need some time to get the online register up and running.

I wonder, however, how seriously this will be taken by companies under "significant control", which are presumably under the effective control of beneficial owners who wish to remain secret.  If they just register the nominees as PSCs, how will we be able to tell?  Most beneficial owners willingly identify themselves to professional advisers on a confidential basis for anti-money laundering compliance purposes, but may not be so happy to disclose their particulars on a public register - which may cause us some professional difficulties.  In any case, I doubt that real money launderers will register themselves as PSCs.

At least I don't need to worry about our company secretarial service not being needed any more, as whilst a little red tape is removed by one hand, a lot more is tied up by the other hand.