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19 Dec 2018

COT's top four commercial issues - December 2018


Season's greetings to you all.

This will be the last commercial update of 2018 and it is a stocking full of consumer protection measures, an update on a previously reported case and musings on the impact AI will have on the law.  

Targeted pricing

In this season of goodwill to all and the growing tradition of families gathering around their glowing screens to shop online, retailers are increasingly employing highly sophisticated methods to sell Christmas presents, one of which is using intelligent pricing strategies. However, the government and the Competition and Markets Authority (CMA) are concerned about the practice of personalised pricing, which is where online shoppers are targeted by being charged different prices for the same items, such as holidays, cars and household goods. They have therefore announced that they have commissioned research into the practice.

Personalised pricing is often tailored to the specific customer journey that an online shopper has taken and the research will explore how and when it is carried out and how widespread it is. It will look at what factors about consumers, such as their address, marital status, birthday and travel history, are taken into account by companies that employ personalised pricing. The research will also examine the different methods through which personalised pricing may be applied (for example, search engines, apps or comparison tools) and the extent to which it may be preventing shoppers from getting the best deals.

Business Secretary Greg Clark said: "UK businesses are leading the way in harnessing the power of new technologies and new ways of doing business, benefitting consumers and helping them save money. But we are clear that companies should not be abusing this technology and customer data to treat consumers, particularly vulnerable ones, unfairly. The research we are undertaking will help us better understand how we can ensure businesses work in a way that is fair to consumers."

The Financial Conduct Authority (FCA) is also currently undertaking its own investigation into car and home insurance policies, after finding potential discrimination between customers. Its aim is to give the FCA a deeper understanding of any harm to consumers arising from general insurance pricing practices, who it affects and, if required, what actions are required to improve the market.

As retailers gear up for Christmas, they should be aware that their pricing strategies may be under scrutiny. Businesses should ensure that they are not employing strategies that may improperly discriminate or make unlawful use of information about their customers. If they're not careful, the regulator may put them on the naughty list.

Misrepresentation is a game of two halves

The High Court in Al-Hawasi v Nottingham Forest Football Club [2018] EWHC 2884 (Ch) has overturned Master Bowles' original decision, finding that an entire agreement clause within a commercial contract did not exclude liability for misrepresentation under section 2(1) of the Misrepresentation Act 1967. In our June update we commented on the initial decision in this case where Master Bowles held that the entire agreement clause in question (which included language that extinguished all previous representations) excluded liability for statutory misrepresentation.

Entire agreement clauses are "boilerplate" provisions used in commercial contracts that make clear that the contract at hand constitutes the entire agreement between the parties and any other communications or documentation between the parties (such as draft agreements, correspondence or written and oral promises) do not form part form part of the agreement and therefore cannot be relied upon by the parties. When carefully drafted, the boilerplate clause provides certainty for the parties as, in theory, parties do not have to remember what may or may not have been said in pre-contractual negotiations and cannot be held liable for anything other than that which is expressly provided for in the content of the agreement.

In this case, the buyer of shares in Nottingham Forest Football Club Limited (the "Buyer") brought a claim against the club's former owner Fawaz Al-Hasawi and his company vehicle NFFC Group Holding Ltd who sold the club in April 2017 (the "Seller") for misrepresentation. The Buyer alleged that a spreadsheet, which had been made available to the Buyer in the due diligence process prior to the sale, had understated the football club's liabilities by £3.8 million.

The Seller applied to court to strike out the claim for misrepresentation, arguing that the entire agreement clause excluded claims for misrepresentation. The clause contained the following wording:

"This agreement…constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter."

The share purchase agreement contained provisions stating that the Seller would indemnify the Buyer against liabilities exceeding £6.6 million (i.e. those liabilities stated on the spreadsheet that the Buyer alleged had been underestimated by £3.8 million). When it became transparent that the club's liabilities were in fact in excess of £10 million, the Buyer brought a claim against the Seller under the contractual indemnity for the £3.8 million difference in the club's liabilities.

The Buyer also brought a claim under the Misrepresentation Act on the basis that the information contained in the spreadsheet was a representation that the club's liabilities amounted to £6.6 million. The Buyer had found this representation to be false and had relied on this representation when entering into the contract, which meant that the Buyer was entitled to statutory damages for misrepresentation.

Master Bowles found against the Buyer stating that the entire agreement clause extinguished all previous representations (including that contained within the spreadsheet) and therefore the claim for misrepresentation brought by the Buyer based on this representation could not be brought under the agreement. However, on appeal the High Court disagreed.

The judge, HHJ David Cooke, allowed the Buyer's appeal disagreeing with the first instance court's interpretation of the entire agreement clause and finding that the clause did not exclude liability for misrepresentation. Master Bowles had made particular reference to the considerable steps taken by the parties to provide a contractual structure within the share purchase agreement to resolve claims likely to arise under the agreement. This showed that the parties intended to be precluded from making any claims other than via the contractual structure created in the share purchase agreement, including claims for misrepresentation.

HHJ David Cooke disagreed with the first instance court's decision that contractual provisions providing for specific types of claim implies that all other types of claims have been excluded under the agreement as a consequence. The judge contended that parties entering into commercial agreements must use clear wording if they intend to exclude claims for misrepresentation; an entire agreement clause determining the scope of the agreement is insufficient. The decision therefore re-asserts the widely held view that clarity is required if contracting parties wish to exclude liability for misrepresentation, such as an express exclusion of liability.

Going… going … and still going

The BBC recently ran an investigation into the sales practices of Boohoo, the clothes retailer, and found that its use of time-limited sales broke the Advertising Standards Authority ("ASA") rules with its misleading promotions.

The BBC recorded promotions on Boohoo's website that didn't end at the time the website stated it would. From the recordings, the countdown clocks simply appeared to reset once the timer reached zero.

The ASA has previously ruled against companies who create artificial sales with time-limits that do not end, as such time-limited sales put unnecessary pressure on consumers to drive them into a purchase.

Boohoo advised that it wasn't their intention to mislead customers and that it extended certain offers due to customer demand.

Such time-pressured sales are common tactics in the online retail market, particular around Christmas and the January sales; however, companies should tread very carefully when seeking to implement such practices as they will be subject to increased scrutiny by the ASA.

Artificially changing the law

Lord Hodge, Justice of The Supreme Court, stated last week that artificial intelligence ("AI") will prompt a change in contract law and new civil liability rules relating to financial services.

Lord Hodge defines AI as the development of computer systems able to perform tasks that traditionally have required human intelligence or tasks whose completion was beyond the boundary of human intelligence. Lord Hodge notes that the current legal system will have to adapt to accommodate the novel forms of transacting which technology now offers. 

Smart contracts (which can be partially or fully executed or enforced without human intervention) were highlighted as an area of future development for English law.  Smart contracts involve an instruction to a computer that if a certain event happens then a computer ensures a certain result. Lord Hodge highlighted that the law will have to address how to provide a remedy if contractual consent has been vitiated, for example, by misrepresentation or fraud.

Lord Hodge also alluded that the use of AI could require civil liability laws to change. He stated that AI used in financial systems could be used for the optimisation of the balance between assets and liabilities, portfolio management, the execution of trades and the detection of fraud. Lord Hodge went on to state that tortious liability can arise from a combination of wrongful intention to harm another or foresight of harm to another and a chain of causation between the individual's action and the resulting harm. If an outcome is the result of a decision by a computer, it is uncertain how the law will attribute fault or form a causal connection. Lord Hodge asked the questions that will be sure to need answers in the years to come:

  • Who is to be responsible for the machines’ decisions?
  • Will there have to be legislation to impose liability on the developer of AI devices in Fintech as one might in relation to the manufacturer of driverless cars?
  • Should legislation impose liability on those who choose to use such devices?

This is sure to be an area of legal development in years to come and one we will be keeping a careful eye on.