29 Oct 2018

COT's top four commercial issues - October 2018

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Welcome to this month's edition of the Stephenson Harwood commercial law update.

This month we see cases covering misrepresentation and duties of care, as well as teenagers being sued by video game companies.

Enjoy.

Geo-blocking: new guidance and application post-Brexit

Regulation (EU) 2018/302 on addressing unjustified geo-blocking and other forms of discrimination based on customers' nationality, place of residence or place of establishment within the internal market (the "Geo-blocking Regulation") is set to come into effect this December and will prohibit geo-blocking within Europe where it is not justified. Geo-blocking is the practice whereby traders in certain sectors restrict their online cross-border sales based on nationality, residence or place of establishment.

New guidance from the European Commission has now been published that gives us more detail on exactly which practices will be covered by the ban.

The guidance clarifies that the Geo-blocking Regulation will apply to business-to-business transactions, as well as business to consumer ones, where the business-to-business transactions "take place on the basis of general conditions of access (i.e. they are not individually negotiated) and the transaction is for the sole purpose of end use (i.e. made without the intention to re-sell, transform, process, rent or subcontract)". This means that businesses receiving goods and services on standard terms are likely to benefit from the right not to be geo-blocked.

The guidance also gives further clarity regarding the traders to which the Geo-blocking Regulation applies, explaining that any trader that sells within the EU will be subject to the rules, regardless of whether they are established within an EU Member State. It is sales to EU residents that will be caught, even if that resident is not an EU national. Where a customer is a corporation the transaction will be covered where the customer is established in a Member State, and it seeks to receive services or purchase goods within the EU, for the sole purpose of end use.

This is all very well, but UK traders may well be asking themselves "what about Brexit"? Well, as we know, that is still very much up in the air. However, the UK government has recently released a technical notice confirming that, in the event of a 'no deal Brexit', the Geo-blocking Regulation will cease to have effect in the UK from the exit date of 29 March 2019. This means that a UK trader would not be prohibited from discriminating between its UK and EU customers when making online sales to them, by for example blocking access to its website to EU users, or offering different terms to its EU and UK customers.

However, the Geo-blocking Regulation would still apply to UK businesses that continue to supply goods and services into the single market, as with all non-European traders. So, for example, a UK trader selling goods online into the EU would not be permitted to discriminate between customers in two different member states – they would still have to offer the same terms to French and German customers, where the Geo-blocking Regulation applied.

This position confirms the Commission's previous Notice to Stakeholders in March 2018, confirming that, subject to any transitional arrangement which may be contained in a possible withdrawal agreement, as of the exit date, the Geo-blocking Regulation will no longer apply to the United Kingdom.

Vision Express makes a spectacle of itself in misrepresentation case

The High Court in Ali V Abbeyfield V.E. Limited [2018] EWHC669 (Ch) has found in favour of four ex-Vision Express optician franchisees that were induced into franchise agreements as a result of inaccurate information given by an employee of Vision Express. The claimants were successful in demonstrating that the employee had fraudulently misrepresented certain facts to the franchisees.

In 2007 and 2008 the claimants agreed to franchise arrangements with Vision Express to establish stores in Southport, Llandudno and Macclesfield. By 2013 all stores were making a loss and the claimants terminated the franchise agreements that had been entered into and brought claims against their franchisor.

The claimants argued that they had entered into franchise agreements with Vision Express as a result of fraudulent or, in the alternative, negligent misrepresentations made by an employee of Vision Express. The employee was a manager working in business development who had informed the franchisees of:

  • the projected performance of the stores;
  • how many eye tests were expected to be carried out;
  • ·of those eye tests, how many customers would purchase glasses or contact lenses; and
  • how long it would take the franchisees to repay the overdraft loan facility that Vision Express had provided and therefore become profitable.

The elements that must be demonstrated in order for a claim for fraudulent misrepresentation to be successful are as follows:

  • the defendant (Vision Express) makes a false representation to the claimant (the franchisees);
  • the defendant knows that the representation is false, or he is reckless as to its truth;
  • the defendant makes the representation with the intention that the claimant would rely on it; and
  • the claimant did indeed rely on the representation and suffers a loss as a result.

There is a presumption, which must be rebutted by the defendant, that the defendant intended for the claimant to rely on the representation. Vision Express contended that there was no intention on their behalf.

The High Court concluded on the facts that the elements of fraudulent misrepresentation had been made out. The representations were all false, Vision Express, acting by virtue of its employee, either knew they were false or was reckless as to their truth, Vision Express didn't manage to rebut the presumption of intention and the claimants had relied on the representations when entering into the franchise agreements with Vision Express. The claimants could therefore recover the losses that had arisen as a result of entering into the franchise agreements on the basis of fraudulent misrepresentation.

Discretely, the High Court made a judgement on a clause contained in the franchise agreements that all pre-contractual representations that have been relied upon should be annexed to the agreement itself. However, significantly in this case, a proviso was included that stipulated that this provision did not apply when claiming for fraudulent misrepresentation. Nevertheless, had the claimant only been able to establish negligent or innocent misrepresentation, this clause would not have been operative as it would be deemed unreasonable for the purposes of the Misrepresentation Act 1967. This was determined on the basis of the parties' imbalanced bargaining power and the fact that the claimants were not advised to take legal advice when entering into the agreement. 

It's not your duty to care

The Supreme Court in Banca Nazionale del Lavoro SPA (Respondent) v Playboy Club London Limited and others (Appellants) [2018] UKSC 43 has upheld the Court of Appeal's finding that a party who makes a negligent misrepresentation which is relied on by an undisclosed principal does not owe any duty of care to that undisclosed principal.

The events in question took place in October 2010 when Hassan Barakat arrived at the London Playboy Club to indulge in a spot of gambling and requested a cheque cashing facility of up to £800,000. Playboy Club's policy was to ask players' bankers for a credit reference of double the facility (i.e. £1,600,000, in this case). Presumably to save their clients' blushes, the Playboy Club used an associated company called Burlington Street Services Ltd to make the approach to clients' bankers, which was done without disclosing the reason for the inquiry or the fact that the reference was required for the benefit of any other person other than Burlington Street.

Barakat's Italian bankers' confirmed that Barakat held an account with them and that he was trustworthy up to £1,600,000 in any week. This turned out to be patently untrue; at the time the reference was given, Barakat did not even hold an account with the bank. An account was opened two days later but held a nil balance until its closure in December that year. Unfortunately for the Playboy Club, Barakat drew two cheques totalling £1,250,000, made a net winning of £427,400 and then left, never to darken the doors of the Playboy Club again, leaving them significantly out of pocket.

The trial judge ruled that the Italian bankers owed a duty of care to the Playboy Club in relation to its reference, but the Court of Appeal disagreed, holding that bankers only owed a duty to Burlington, the only problem being that Burlington had not suffered any loss. The Supreme Court considered the seminal tortious case of Hedley Byrne & Co Ltd v Heller & Partners Ltd which found that in the case of a special relationship equivalent to contract between claimant and defendant, then there is a duty of care owed, and pure economic loss in negligence can be recovered. However, the defendant's voluntary assumption of responsibility towards the claimant is a key part of this principle, together with evidence of proximity between the representor and the party to whom he is supposed to owe a duty of care. The courts have proved reluctant to expand the scope of liability concerning the category of persons to whom such a duty of care is owed.

In Hedley Byrne, the person relying on the representation was not actually identified by name to the representor. However, the courts held that the representor understood that their statement would be relied on by an unidentified but readily identifiable client. This made it distinguishable from the case at hand; there was no evidence to suggest that the Italian bankers knew that their reference would be communicated to or relied upon by any person other than Burlington, nor did they know the purpose for which the reference was being provided. Lord Manche noted in the judgment that, had the representation from the Italian bankers been made (whether expressly or impliedly) for the benefit of an unnamed (as opposed to entirely undisclosed) principal or client of Burlington, then the claim should have succeeded.

Playboy Club's counsel attempted to argue that because the Club was Burlington's undisclosed principal, the relationship between the bankers and the Club was "equivalent to contract". Under English law, an undisclosed principal may declare themselves and enter upon a contract. The Supreme Court did not seem overly fond of this rule of law, calling it an "anomalous legacy…which survives in the modern law on account of its antiquity rather than its coherence" and sharply brought an end to this train of thought, finding (amongst other things) that the relationship between a person and an undisclosed principal is not analogous to a relationship which gives rise to a duty of care, not least because the relationship is not proximate by virtue of the principal being undisclosed.

Although the Italian bankers came in for some criticism from the Supreme Court for their seemingly indifferent attitude which saw them handing out credit references like sweets at Halloween, Lord Sumption summed it up by saying that it was clear that they "did not voluntarily assume any responsibility to the Club".

Rules of the game

It can't have gone un-noticed that the video gaming industry is a very lucrative market with the top three video gaming companies generating over $35 billion revenue in 2017. With games being accessible on tablets or mobile phones and no longer requiring large and expensive consoles or computers to play on, this industry is likely to continue to grow.

In addition to the gaming market itself, there has been a sub-industry growing thanks to steaming websites such as YouTube, whereby gaming experts stream video blogs of themselves playing games live or offering tips, codes and cheats in order to be more successful in a particular game. This sub-industry is also lucrative with these "social-influencers" able to earn money through sponsorship and marketing deals.

While these two industries can work closely together and often require support from the other to grow their respective markets, there is also a conflict growing regarding the video game bloggers offering cheats and software upgrades to their followers to gain a competitive advantage when playing these video games.

While such cheats and codes have been around from the time video games were created, the conflict is gaining more significance due to the interactive nature of these video games thanks to the advances in technology and internet speeds. As an example, those with children or a keen interest in video games will be familiar with the latest gaming phenomenon called Fortnite. Fortnite offers the user the chance to battle it out with up to 100 different players around the world and be the last player standing. The interactive feature of this game makes the need for a level playing field even more prominent.

As a result, we are seeing a significant increase in the number of cases and injunctions being filed by the gaming companies to prevent such cheats and codes being made available to the market. A recent example of this is the creator of Fornite, Epic Games, suing teenager Brandon Lucas for selling cheats to his 1.7 million subscribers. Such a claim is largely based around copyright infringement, where the user is infringing the creator's copyrights by modifying the licensed software and creating derivative works.

Another recent example is the developer of the popular game Grand Theft Auto being granted a court order in Australia to search the homes of the people selling cheats to its games.

These examples, together with parties like the Premier League in the UK, are showing an increasing trend of rights holders taking an active role in protecting their assets from unauthorised access or modification, with the courts showing a strong willingness to support such claims.

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