Business, Innovation and SkillsWritten evidence submitted by Which?

1. Introduction to Which?

1.1 Which? is an independent, not-for-profit consumer organisation with around one million members and is the largest consumer organisation in Europe. Which? is independent of Government and industry, and is funded through our own activities, such as the sale of Which? consumer magazines, online services and books. Which?’s mission is to make individuals as powerful as the organisations they have to deal with in their daily lives by empowering them to make informed decisions and by campaigning to make people’s lives fairer, simpler and safer.

2. Which? view on the Government’s Consumer Rights Law Reform Project

2.1 We welcome the draft Consumer Rights Bill, part of the Government’s reform agenda to update UK consumer law. The publication of the draft Bill is the end of a long gestation period that can be traced back many years and forms the main part of the reforms proposed by the Government.

2.2 The draft Bill is not, however, as comprehensive as it might have been given the need to balance the consumer interest with the Government’s stated intention of avoiding “over regulation” and promoting economic growth. It is a regret that some measures, especially on Alternative Dispute Resolution (ADR), are not included in the Bill. This is partly because the Government is about to consult on implementing the EU ADR Directive which must be transposed into UK law by July 2015.

2.3 Access to redress is a key element of a strong consumer rights landscape. As such, it is essential that the Consumer Rights Bill is considered alongside the implementation of the EU ADR Directive. This is likely to occur at approximately the same time as the Consumer Rights Bill is implemented following Royal Assent. Further, the Consumer Rights Bill could potentially be the vehicle by which the Government introduces the necessary enabling legislation to create a Consumer Ombudsman with the capacity to deal with any consumer-to-business dispute. The details could be left to secondary legislation, following the Government consultation on implementing the ADR Directive which is due to be published shortly. We suggest, as the ADR Directive already requires that ADR exists for all consumer transactions, the draft Bill could take this further and actually introduce a framework for a Consumer Ombudsman. Although the details of such a scheme would need further analysis, the most essential feature for consumers is that it provides a single point of entry and ensures that high quality ADR is available for any transactional dispute with a trader.

2.4 As the Select Committee will know, as well as the draft Bill, the reforms also include implementation via secondary legislation of the EU Consumer Rights Directive (CRD) by June 2014 and the Law Commission report on misleading and aggressive practices. Government proposals on both were published on 6 August 2013 and are open to consultation until 11 October 2013. We also broadly welcome these proposals.

2.5 In particular, we are supportive of the CRD proposals (Article 21) to ensure that telephone calls to “post-contract customer helplines” (eg customer service or complaints lines) must only be charged at a basic rate. This covers all sectors where consumers are paying for a product or service from a trader. When the original EU legislation was drafted, a number of exemptions were permitted. This means that the regulations do not automatically apply to a number of sectors including financial services, package travel, healthcare provided by regulated professionals (doctors etc.) and most elements of passenger travel.

2.6 The Government already plans to ensure that the requirements do apply to some of the sectors that could have been exempted. In particular, they intend to legislate so that it does apply to regulated professionals that sell healthcare products and they are also consulting on plans to apply the premium rate number ban to travel, timeshare and package travel. Which? does not believe that any industries should be exempt from the rules as premium rate or high cost numbers for customer service or complaints are fundamentally unfair. As such, we are supportive of bringing travel related businesses into the scope of the Consumer Contracts (Information, Cancellation and Additional Payments) Regulations.

2.7 We would also like to see public services and the financial services sector brought into line. However, we recognise that extending the scope of these regulations is not the appropriate way to do this. In the case of financial services this is because of the extensive regulatory system (based on the Financial Services and Markets Act 2000) that already applies to this sector. As such, in practice, this means we would like to see the FCA make amendments to their rules so that financial services companies also cease charging premium rates for their customer help-lines. In terms of public services, we would also like to see public sector helplines change the way they charge. In July 2013, the National Audit Office (NAO) published a report exploring the extent of use of premium numbers by public sector agencies and have found that the cost of these numbers to UK consumers is approximately £56 million.

2.8 One key issue included in the Consumer Rights Directive (Article 19) but already in force in the UK since April 2013 is a ban on excessive card payment surcharges. After Which? campaigning, the Government agreed to implement this provision early. We are now monitoring compliance and are also investigating if charges, in particular for online purchases, are appearing in other ways, such as administration fees, fees to print tickets, etc. This seems particularly prevalent in the travel and entertainment sectors.

2.9 Another particularly welcome measure included in the CRD is the ban on pre-ticked boxes for additional purchases such as travel insurance when buying a flight (Article 22).

2.10 We will now turn to our detailed comments on the draft Consumer Rights Bill. We do not have comments to make on all the draft Bill’s Clauses, however where we do have comments on specific Parts, Chapters or Clauses (and any relevant Schedules) in the draft Bill, this is set out in the same order as the Bill. Attached separately are annexes containing more detailed information which we hope will assist the Committee’s scrutiny of the draft Bill.

3. Summary of Key Points on the Draft Consumer Rights Bill

3.1 Part 1: Goods, Digital Content and Services: Which? broadly welcomes the proposals set out in Part 1. We have some specific concerns including (i) the time limit for rejection and repairs for goods, (ii) the right to reject and get a refund for faulty digital content and (iii) a “satisfactory quality” test for services. We would like to see greater consumer education about consumer rights, for example via “point of sale” information.

3.2 Part 2: Unfair Contract Terms: Which? broadly welcomes the consolidation of, and clarifications to, the existing rules on unfair terms introduced by the draft Bill. However, there are several areas where we believe the proposals could and should go further by (i) limiting the range of price terms that are protected from an assessment for fairness, (ii) strengthening the rules to help prevent consumers being forced to accept a variation to a contract in circumstances where they have a legitimate expectation that the bargain would not change and (iii) clarifying the consequences of failing to comply with the transparency obligations.

3.3 Part 3 (Clause 81): enhanced consumer measures and other enforcement. Which? welcomes the Government’s proposals to extend the range of remedies available to public enforcers of consumer law. We believe that the proposed remedies should be extended to private enforcers as well.

3.4 Part 3 (Clause 82): Private Actions in Competition Law. Which? supports the introduction of opt-out collective proceedings for competition law infringements. To ensure the regime works in practice, minor amendments are needed in relation to (i) settlement offers and (ii) the requirements for certifying claims.

3.5 We support the Government’s proposals (via secondary legislation) to implement the Consumer Rights Directive (CRD) and the Law Commission report on misleading and aggressive practices. We would like to see the CRD’s ban on “high cost” phone lines extended to the travel sector and, via other appropriate regulation or legislation, to financial services and public services. After our campaigning, we were pleased that the Government implemented the ban on excessive card payment surcharges early (in April 2013) but are monitoring compliance and whether additional fees and charges are made in other ways for online purchases (eg administration fees).

3.6 It is a regret that some measures, especially on Alternative Dispute Resolution (ADR), are not included in the Bill. This is partly because the Government is about to consult on implementing the EU ADR Directive which must be transposed into UK law by July 2015.

4. Part 1: Consumer Contract for Goods, Digital Content and Services

4.1 Which? welcomes Part 1 of the draft Bill. We note below our specific comments on each section: goods, digital content and services. We regret that the draft Bill does not meaningfully address consumer education. The empowerment of consumers will often be improved by ensuring they have the right information at the right time and in the right format. To aid consumer understanding of their rights and to be able to more easily exercise them, we suggest that the Committee considers if the draft Bill should require traders to provide simple and consistent basic consumer rights “point of sale” information in shops, off premises and online, eg the 30 day time limit for early rejection. Such summary would need to be short and user friendly, probably in diagrammatical form (eg as a flow chart). Consumers are often ignorant of their rights and therefore do not exercise them. We want the provisions of the draft Bill to be used and to be effective which means consumers being aware of their legal rights. This is also why Which? in early 2013 re-launched and upgraded its “Consumer Rights Website”. This provides online information and advice on common consumer problems that is free to all consumers and is not restricted to Which? subscribers.

4.2 Chapter 2: Goods (Clauses 3–34)

For the most part, Which? considers the legislative framework and associated remedies for the sale of goods to be both well established and effective. In light of this, we do not recommend any significant changes to the existing body of law. As such, our comments are fairly specific and relate to a small number of areas where small modifications could make the law work more effectively. These issues are discussed below.

4.3 Clause 21: Time limit for early rejection

We would like to see some additional flexibility added into the provisions around the early right to reject. In particular, we would like it to be made clear in the legislation that the 30 day period can be extended if necessary, to allow for extenuating circumstances. It should not be necessary for this to be specified in advance but rather a judgment about whether an extension should be given should depend upon an objective review of the specific circumstances surrounding the case. There may even be merit is setting out in guidance some of the more obvious circumstances (such as Christmas shopping) where an extension could be presumed.

4.4 Clause 23: Right to repair or replacement

At present, the Bill suggests that “if the consumer requires the trader to repair or replace the goods, the trader must… do so within a reasonable time”. We understand that there may well be complications that make it difficult to exactly predict how long a repair will take. However, we consider the current wording to be ambiguous and therefore likely to lead to uncertainty and possible inconvenience for consumers. As such, we think there is a strong case for greater clarity.

4.5 Our preference is for a “long-stop date” to be established and we have previously suggested that the following would be a reasonable approach: “…the trader must conduct the repairs as soon as is reasonably practical and within 14 days unless the consumer expressly agrees otherwise”. We think this represents a fair balance on the following grounds:

For many repairs, 14 days should be adequate, even if spare parts need to be sourced from overseas.

It provides for flexibility—the consumer can agree to a longer period where they wish to maintain their original.

But it means the consumer is not forced to accept a long repair period, and so risk being significantly inconvenienced.

4.6 Clause 24: Right to price reduction or final right to reject

In our previous comments on the draft proposals, one of the issues that we wanted to see clarified was the proposed rules around deductions for use. We welcome the fact that this issue is on the way to being addressed. In particular, we are supportive of the proposal in this clause that there should be an initial six month period within which no deduction should be made. Beyond this time, the objective should be for deductions based on the lifetime of the good, or the best proxy of this that can be found. In light of this, we had previously been supportive of the proposal to base any deduction on the passage of time and we supported the option for this to be done in relatively small incremental steps. We would still maintain that this is likely to be the fairest way of dealing with this but we also recognise that there are complications with any method. As such, we are aware that a meeting has been scheduled to discuss this further and we look forward to participating in this process.

5. Chapter 3: Digital Content (Clauses 35–49)

5.1 Which? supports the Government’s aim to clarify the consumer law relating to the purchase of digital content. As the existing consumer protection framework pre-dates the digital content era, there is a clear need to clarify the rights that apply to the delivery of digital content and to ensure the regime is “fit for purpose” and future-proof. We welcome the Government’s proposals to align the digital content regime with that of goods and in doing so provide a clear quality standard that digital content must meet and a clear set of remedies available for when it does not. However, there are a number of specific issues that we are still concerned about.

5.2 Clause 41: The difficulty of proving liability

We are concerned that in situations where there are multiple service providers involved in the delivery of digital content (clause 41), that it will be difficult for a consumer to prove who is liable for problems with the service delivery. Although we recognise that the complexity of these arrangements means that it is difficult to legislate precisely for each scenario, we would ask the Select Committee to consider the importance of specific and detailed guidance with relation to this issue.

5.3 Clause 44: Right to reject

We believe there should be a short term right to reject digital content included in the remedies listed at clause 44(2). We recognise the perceived problems regarding fraud that could flow from incorporating a right to reject, however we are unconvinced such concerns are, in practice, as significant as they are made out to be. In reality, our experience shows that where faulty digital content is purchased, a consumer will usually desire a replacement copy and/or be willing to accept a “fix” to address the identified issue. Consequently, the suggested approach would largely accord with consumer expectations. However, we believe that it is inappropriate for the law to deny consumers an appropriate remedy due to the perceived risk of certain behaviour from a minority of others. Further, where digital content is purchased that is not as described, a replacement or repair will often not be a suitable remedy. At the very least, clause 44(4) should be extended to cover a breach of clause 38.

5.4 Clause 47: Right to a refund

Although we welcome the provisions in Clause 47(1), we are concerned by the limitations that 47(2) places on potential consumer redress. If a trader is unable to repair or replace digital content and a refund is the only remedy available, it would not be appropriate to only offer a partial refund depending on which parts of the digital content were not working. For example, if a consumer downloaded an album in which one song didn’t play properly and the trader was unable to repair or replace the album, the consumer would expect a full refund for the entire album, rather than only receiving a refund for the percentage of the price attributed to that single song.

5.5 Software lifespan

We have received anecdotal evidence from consumers regarding the lifespan of software on certain physical products. This has arisen most notably in relation to mobile phones (eg smart phones running Android operating systems), computer operating systems, and Smart TVs, but may become relevant to other technology as markets develop. New hardware models are sold with up-to-date operating software. Over time the manufacturer may cease to support the software associated with the earlier hardware and instead focus only on that found on more recent models. As a result, if problems arise on older versions of the software, consumers are unable to download an update or “fix”. Consumers may not be able to update the software on their current hardware, meaning they are unable to access certain apps or complementary software that only works on newer versions of the operating software. This is not about consumers having the latest cutting edge technology, but rather that older models stop working properly as software is not updated.

5.6 With regard to smart TVs, we have been told of cases where a consumer is sold the TV on the promise of BBC iPlayer functionality. However, in reality the manufacturer only licences the right to include this functionality for a fixed period and/or in relation to newer models only. There is no guarantee that either the functionality will continue throughout the expected lifespan of the TV or that the licence would not be revoked. Consumers should be able to expect that not only will their TV continue to work for a reasonable period of time, but that the software on it will also continue to function. The lifespan of software on digital products should form part of the test for durability under clause 3(d).

6. Chapter 4: Services (Clauses 50–59)

6.1 Overall, we welcome the proposed changes to the regime on services. As has previously been shown, both by the OFT’s 2008 study and by our own research, there is considerable consumer detriment in the provision of services in the UK. Which? regularly receives feedback from consumers regarding the goods and services they purchase and the majority of consumer complaints relate to the UK services sector.

6.2 Complaints levels about services are quite high:1 two in five British consumers have made a complaint about a service in the last 12 months. This survey explores the extent of complaints in different sectors. It finds that broadband, mobile phones and energy are the most complained about sectors.

6.3 A number of service providers do not take responsibility for problems. Of these complaints, another two in five are not resolved by the provider—this tends to be because the provider does not take responsibility for the issue, or blames another company.

6.4 40% of complaints aren’t resolved by the provider, although this varies by sector. And top reasons include a shifting of the blame. Problems not being resolved by the provider seem most prevalent in:

Trades services—58%

Airlines/holiday operators—56%

Car/vehicle repairs—53%.

6.5 The main reasons given for this are:

That the problem was caused by circumstances out of their control—26%

That another company was responsible—15%

That it was not possible to fix the problem—15%

That they have done what they had promised to do—13%

That the terms and conditions of your contract said they weren’t liable—11%

That the problem was caused by consumer—10%

The provider ignored the issue/gave no response—9%

That they have complied with the industry standard—9%.

6.6 In addition, previous Which? research has shown that consumers do not generally feel well protected when they purchase services and they are not confident they will be treated fairly. The same research also identified that 31% of consumers who failed to complain when they were unsatisfied with a service did so because they did not believe anything would be done. In light of this, we broadly welcome the direction of travel in the Draft Bill. Addressing these issues through the Consumer Rights Bill will deliver considerable benefit for consumers and businesses alike. Clarity over supplier obligations will help drive up standards, benefitting the good businesses, while strengthened consumer remedies will improve consumer confidence and help stamp out bad practice. In addition, simple clear rules will reduce confusion and lead to fewer disputes saving both time and money.

6.7 Clause 51: Service to be performed with reasonable care and skill

Whilst we are broadly supportive of the changes, we do have a concern about the nature of the test that is being proposed. Specifically, we are not convinced that having a test based on reasonable care and skill is going to be the optimal way of ensuring high standards. The main issues that we can foresee are as follows:

Proving that there has been a lack of reasonable skill and care is likely to be difficult.

This is likely to be a particular problem where there is a lack of clarity over the precise nature of the service to be provided and/or there has been use of contractual small print to limit the obligations of the trader.

Even where reasonable skill and care has been exercised, consumers can derive no meaningful benefit from the contract, but are nevertheless left without a remedy.

6.8 Our strong preference would be to see a “goods style” quality standard applied to the full range of service contracts such that all services should be of satisfactory quality. We believe this would help to address some of unjust outcomes currently experienced under the current regime. It would also create a simple message for both business and consumers—that all purchases must be of satisfactory quality—and this clarity is a core aim of the legislation. We do not share the Government’s concerns that it would lead to significantly worse outcomes for business. While there will inevitably be some circumstances in which a business would be liable under this new regime (but wouldn’t be so under the current regime), we do not believe this represents an unfair burden. The main advantages would be as follows:

Whether something is of satisfactory quality is an objective test based on what was agreed, the price paid and what a reasonable person would expect in the circumstances.

The trader is often in a better position to mitigate the risk of not delivering a particular outcome eg through his contractual relationships with third parties involved in the supply, through his own performance (eg checking materials before installation) or through the purchase of insurance.

This test would largely reflect current best practice and as a result, should not significantly burden business with additional costs.

Currently, whether a service has been performed with reasonable skill and care is largely assessed by reference to whether the outcome of the service was satisfactory. Where it is not, there is a presumption the service was not performed with reasonable skill and care.

In most cases, therefore, the change in regime would only likely shift the burden of proof, rather than change the substantial liability.

6.9 We have identified the following scenarios where a change to a “satisfactory service obligation’ is most likely to be of benefit to consumers (ignoring for now the general benefits previously discussed, such as empowerment from it being more intuitive and objective standard):

Where the trader claims the consumer’s dissatisfaction results from circumstances beyond their control;

Where a third party is at fault (eg one of their suppliers was slow making the delivery);

Where the trader has met industry standards, but this has not resulted in the envisaged service;

Where the scope of the service has not been properly defined. For example, where the trader has agreed to “tile a wall” and the consumer assumes this includes an assessment of whether the wall is suitable to be tiled. (If it has been recently plastered, it may need longer to dry out, for example).

6.10 A further advantage of the proposed changes to the service regime is that by better aligning the goods and services regimes we will be better able to deal with the problems that can arise over “mixed contracts”, where it can be uncertain which regime applies. In these circumstances, it can be difficult for a consumer to know whether a good or service is at fault and it can be even more difficult for them to prove one way or another. This is particularly complicated where the goods and services are provided by different companies. In these circumstances, it seems difficult to find a solution to the risk that consumers cannot tell whether the good or the service is at fault and therefore don’t know who to go to seek redress and don’t know which remedies apply. We would welcome efforts to continue looking for a solution to this problem and to that end, we believe that fully aligning the regimes for goods and services would at least help limit the detriment in this area.

6.11 Clause 52: Information about a trader or service to be binding

The introduction of this clause is extremely welcome as we believe it will empower consumers to challenge traders where they or their service do not live up to the expectations. Sub-clause 3 states consumers cannot be expected to rely on promises that are qualified during the transaction, and we appreciate the purpose behind this exception. However, we do not think the aim of sub-clause 3 is to enable traders to “qualify” marketing messages in contractual small print. Nonetheless the current wording does not specifically exclude that scenario—we think clarifying this to exclude this possibility would be a valuable amendment.

6.12 Clause 57: Right to repeat performance and Clause 58: Right to price reduction

We strongly welcome the proposed introduction of a clear remedies regime. At present, the lack of clarity around issues such as requiring traders to put right poor or faulty service, leads to uncertainty. The proposal to have a two part remedy regime that includes both the right to repeat performance and the right to a price reduction (in certain circumstances) seems appropriate to deal with most scenarios.

6.13 Whilst we are broadly supportive we would like to see one or two small improvements. In particular, we would like to see the remedies brought more into line with the remedies regime for goods. There are a number of specific ways in which this could be done.

6.14 Firstly, we would like to see it clarified that where there is to be a price reduction that this could be as much as a full refund in certain circumstances—in particular where the repeat performance has obtained no benefit or no substantial or meaningful benefit under a contract.

6.15 Secondly, where there is to be a price reduction, this should be calculated based on the value received by the consumer under the contract, not the costs incurred by the trader. This means that any price reduction should not be linked solely to the element of the contract that has not been performed with reasonable skill and care. The risk of not doing this is that traders could limit their liability by dividing up the provision of the service into its component parts. This would be a different way of approaching things from the consumer’s perspective which is likely to view the complete delivery as being of importance.

6.16 Thirdly, we would like it to be easier for consumers to move through the tiers of the remedy regime. In particular, this means moving straight to a tier 2 (price reduction) remedy in appropriate circumstances. Examples could include either instances where services provision has been dangerous or where the fault is so significant that the consumers has justifiably lost confidence in the trader to be able to put things right. We would also like to see clarity that contracts can be cancelled completely in circumstances where there has been a fundamental “non”-performance.

7. Part 2: Unfair Terms (Clauses 64–78 and Schedule 2 and 3)

7.1 Which? broadly welcomes the consolidation of, and clarifications to, the existing rules on unfair terms introduced by the draft Bill. However, there are several areas where we believe the proposals could and should go further—we focus on the key areas below:

7.2 To ensure regulators have the ability to challenge hidden charges by limiting the range of price terms that are protected from an assessment for fairness (amending Clause 67(5))

A key and disappointing consequence of the Supreme Court’s 20092 decision in relation to unauthorised overdraft charges is that it is much harder for enforcement bodies and consumers to challenge prices that are disclosed in contractual small print.

7.3 The purpose of the rules on unfair terms is to protect consumers from surprises “hidden” in contractual small print by allowing “suspect” contractual terms to be assessed for fairness. The rules explicitly exclude some contractual clauses—including some setting out the price—from any fairness assessment on the basis. The effect of the Supreme Court’s decision was to significantly broaden the number of price terms that are protected from a fairness assessment.

7.4 Which? is concerned that regulators no longer have sufficient power to tackle charges hidden in contractual small print. Although the Government shares this concern, and has sought to narrow the scope of the price exemption, we do not think they have gone far enough. The draft Bill excludes prices if they are transparent and prominently disclosed to consumers. However, just because a price is prominent does not mean a consumer will properly factor that price into their purchasing decision for example, because they lack the understanding of how the product or market operates necessary to predict the likelihood of a charge being imposed. Some typical examples of charges that can be “hidden in plain sight” are set out in Annex A, along with further evidence in support of this position.

7.5 The draft Bill assumes that competition and market forces will keep prominent prices in check such that specific regulation is not required. However, this faith is misguided in relation to charges that consumers either do not or cannot properly take into account.

7.6 Which? believes the price exemption must be narrowed further to take into account the practical reality of a consumer purchase, along the lines suggested in Annex A. We believe only those prices a consumer can be expected to take into account during the purchasing process should be excluded. We think the “main price” payable under the contract is a useful proxy for this. We note that such an approach would not automatically render contractual clauses unfair—the consequence would simply be to ensure enforcers have the power to launch an investigation where necessary to tackle identified consumer detriment.

7.7 Strengthening the rules to help prevent consumers being forced to accept a variation to a contract in circumstances where they have a legitimate expectation that the bargain would not change (amending clause 65(5) and Schedule 2).

Where a consumer has committed to a minimum contract period (eg a mobile phone contract or a TV subscription package) there should be an equal commitment by the trader during the minimum term. Accordingly, it is extremely unlikely that a term enabling a trader to vary a contract during a minimum term will be fair. Similarly, in contracts of a fixed duration (eg a mortgage or long term protection products), consumers have a legitimate expectation that the bargain will not change. In the event a change is necessary, that change must only be for a valid reason and the consumer should not be placed in a position where he is forced to accept the change. Unfortunately, these principles are not adequately reflected in the draft Bill.

7.8 The simple ability to terminate a contract in a response to a change does not guarantee consumers are adequately protected, as was recognised by the European Court of Justice in its decision in RWE Vetreib.3 To ensure the consumer is treated fairly, the right to terminate must offer the consumer a genuine ability to avoid the impact of the change. Otherwise, the practical reality is that a contract variation can be “forced” on a consumer where despite the right to terminate (i) a consumer is unable to switch to an equivalent product so is faced with accepting the change or going without; or (ii) switching to an alternative product leaves the consumer equally disadvantaged. This is exactly the kind of “surprise” that the unfair terms rules are designed to prevent.

7.9 But this was the situation faced by up to 13,500 Bank of Ireland customers earlier this year when the Bank announced it was increasing the interest rate the interest rate payable on some of its tracker mortgages by up to 3.99%, a change adding £100s to monthly repayments in some cases. Although the affected customers could in theory avoid the price rise by terminating their contract, for most this was not the practical reality. For some, a change in circumstances (eg retirement, unemployment) meant alternative products were not available. For others, who could switch, there were significant costs associated with doing so (eg mortgage application fee, valuation fees etc) and the interest rate was unlikely to match their old rate at the Bank of Ireland. In other words, those customers faced Hobson’s choice: stay and face a significant and unexpected price rise, or switch and pay significant and unexpected additional costs. Such scenario is not limited to mortgages, and similar situations have arisen, for example, in relation to long term insurance products and in the telecoms sector.

7.10 Accordingly, to help give effect to the ECJ findings in RWE Vertreib, we also suggest the wording of clause 65(5) is amended to expressly set out that the impact on the consumer upon exercising a right to terminate a contract early is relevant to a fairness assessment. However, to properly give effect to the ECJ’s case law, we think Schedule 2 also needs amending.

7.11 Schedule 2 of the draft Bill sets out a number of terms that are presumed to be unfair. While it includes some terms covering contract variations, it does not include variations in all the circumstances outlined above. The fact some, but not all, terms are covered presents difficulties when challenging unfair terms because some believe it to be the case that where a term is similar to, but not identical to a term on the indicative list, this indicates the term is fair (because otherwise it would have been included on the list).

7.12 This issue arises in particular in relation to the exceptions in paragraphs 21–26 of Schedule 2, where many traders take the view that if a term falls within an exception, it is presumably a fair term. Indeed, the fact that the mortgage term relied on by the Bank of Ireland fell within paragraph 22 seems to have been a significant factor in the clause avoiding regulatory action in the above example. We do not believe this was the approach envisaged when the current rules on unfair terms were enacted.

7.13 With this in mind, we believe the best way to give effect to the ECJ”s case law and introduce the clarity needed to deliver fairer consumer outcomes in the circumstances outlined above would be to introduce a new indicative unfair term into Schedule 2. We suggest something along the following lines would be appropriate:

“A term (including those within the scope of paragraph 22) which has the object or effect of permitting a trader to increase the price of, or alter unilaterally any characteristics of, goods, digital content or services during any minimum contract period or before the end of a contract of a specified duration without a valid reason or where the consumer is not free to dissolve the contract without being disadvantaged.”

7.14 For similar reasons, and to help clarify that changes to a contract should be for a valid reason, we also suggest paragraph 25 of Schedule 2 is amended so it only exempts price variations to the extent those changes are caused by changes to a financial market rate or index that the trader does not control. Currently, the clause exempts price rises where these are within the provider’s control (such as the change to the mortgage interest rate in the Bank of Ireland case mentioned above).

7.15 To clarify the consequences for failing to comply with the transparency obligations in Clause 71.

Although, Clause 71 requires written contractual clauses and consumer notices to be transparent, it does not specify the consequences if a traders fail to comply with this obligation. It is arguable that a term that is not transparent should be automatically unfair as consumers cannot be expected to properly understand or take such clauses into account. If the Committee does not support such an approach, then we would suggest at a minimum a presumption that such terms are unfair should be introduced.

8. Part 3: Miscellaneous and General

8.1 Clause 81 and Schedule 6: Enterprise Act 2002: Enhanced consumer measures and other enforcement

We welcome the Government’s proposals to extend the range of remedies available to public enforcers of consumer law. We believe that the proposed remedies should be extended to private enforcers as well.

8.2 We are concerned that the threat of court action is not always sufficient to encourage traders to engage meaningfully in negotiations with enforcers over remedies. Given the time, costs and resources involved with going to court, we consider the deterrent effect provided by the threat of court action is likely to have an equal, if not larger, impact on the enforcer. This risk is likely to be especially acute as enforcement budgets are streamlined. Accordingly, we feel that the draft enforcement mechanisms must be extended. This could include either the ability for enforcers to impose monetary penalties or a simplified and streamlined court process.

8.3 Clause 82 and Schedule 7: Private actions in competition law

8.4 We welcome the provisions around private actions in competition law. We are encouraged by the Government’s focus on collective settlement as a viable alternative to formal proceedings, which will save considerable resources for the parties, the CAT and the public. We also strongly support the introduction of opt-out collective proceedings for competition law infringements.

8.5 The key now is to ensure that the collective redress regime delivers the outcomes that it was designed to achieve. Other collective redress mechanisms in the UK have fallen into disrepute and disuse. We are keen to ensure that this is not the fate of the new regime. It must be emphasised that the practicalities of collective proceedings are not merely an aside; if bringing or settling collective proceedings becomes unviable (either legally or financially) then the commendable aims of the regime will fall away and access to justice will be hindered.

8.6 To this end, there are two main areas in which we believe the draft Bill could be amended to ensure that the regime works as intended in practice, delivering timely and cost-effective redress in a manner that is fair to both claimants and defendants.

8.7 First, it must be ensured that collective settlement is viable in practice.

The draft Bill provides that a collective settlement must be “just and reasonable” in order to be approved by the CAT. But how will representatives know whether a settlement offer is just and reasonable? They will not be privy to the data needed to assess the true loss to victims of an infringement. This information lies exclusively in the hands of the defendants.

So when a defendant makes a settlement offer, a representative must either accept the offer on behalf of the represented class without knowing whether it is reasonable, or reject the offer and risk paying the defendant’s costs if it turns out the offer was in fact reasonable. The structure of the system thus motivates defendants to make unreasonably low offers and motivates representatives to under-deliver for represented victims.

This can be resolved by a simple amendment to paragraphs 10 and 11 of Schedule 7, namely:

requiring the party who makes a settlement offer, and not the other party, to demonstrate to the CAT that the offer is “just and reasonable”; and

ensuring that the benefits which usually flow from a settlement offer do not attach to settlement offers that are not, in the CAT’s opinion, “just and reasonable”.

8.8 Second, where early settlement is not possible, the process of certifying collective proceedings must be streamlined and efficient.

The requirement to show that claims brought together as collective proceedings raise “the same, similar or related issues of fact or law” imports considerable uncertainty into the certification process, as shown by previous experience in the UK and abroad.

This uncertainty will generate protracted disputes around the meaning of the certification requirements, causing cost and delay and undermining the efficacy of the regime.

This can be overcome by making it clear in paragraph 5 of Schedule 7 that all end consumers who buy a product affected by a cartel have claims that (at the least) raise related issues of fact and law.

8.9 Further details as to why these amendments are crucial to the success of the regime can be found in Annexes B and C respectively.

Mark McLaren
Parliamentary and Legal Affairs Manager

27 August 2013

Annex A

PART 2: UNFAIR TERMS

Further evidence in relation to the proposed changes to Clause 67

1. Examples of prices disclosed but not properly taken into account by consumers in their purchasing decisions

We set out below some examples of charges which are unlikely to be taken into account by consumers when making their purchase, even though they may be transparent and prominently disclosed during the transaction process:

A consumer taking out a current account with a bank is unlikely to take into account the cost of an unauthorised overdraft if they either expect to stay in credit or they have agreed an authorised overdraft that they expect to stay within.

When renting a property, a consumer is focused on the monthly rent, deposit and other upfront charges imposed by the landlord or the lettings agent. Charges that occur later in the relationship, such as renewal fees, check out/inventory fees will not be properly considered, as they will not necessarily arise.

A consumer is unlikely to properly consider the out of tariff call charges where they expect to keep within the limits set down by the monthly package they are purchasing. Similarly, the costs of using a phone in Portugal, for example, will not be considered by the consumer unless they know they will be going to Portugal (and even then, only if they expect to spend a significant amount of time in Portugal).

A consumer purchasing car insurance will focus on the annual premium and will not, unless they are expecting to change cars or move house, consider the administrative charges applicable for making such changes to the policy.

Consumers will be unlikely to consider the cost of exceeding download limits when purchasing broadband or smartphones, especially where the limits are perceived to be high. This results, at least in part, due to difficulties for the consumer in assessing their required data needs.

Unless they expect to be using their credit card for cash advances, the costs associated with cash advances is unlikely to form part of the consumer’s decision regarding the appropriate credit card to obtain.

When purchasing a flight, the cost of an airport check-in is unlikely to form part of your purchasing decision if you expect to check in online.

2. Why transparency and prominence are not enough

Just because a consumer is informed about certain charges that could arise, it does not mean they will properly factor those charges into their purchasing decision. In other words, you cannot expect to force an ancillary part of a deal to become part of the “core bargain” just by making it more prominent.

Today more than ever, it is less realistic to expect consumers to properly understand and apply all the information provided when they are making a purchase. There are a number of reasons for this, for example

Consumer products and markets are becoming increasingly complex. As a result there is “more to tell” and a greater risk of a consumer reaching saturation point before they’ve taken on board all the important information.

The increased complexity means there is an increasing risk that consumers simply do not understand the significance of the information being provided to them.

Information asymmetries can create incentives for traders to “frame” the information in certain ways to take advantage of a consumer’s lack of understanding.

Many consumer purchases are ancillary or incidental to a more important goal. As a result, a consumer will tend to focus on the predominant element. For example, when buying a house, their focus is the house and taking out a mortgage is simply a means to achieve this aim.

In addition, the OFT’s report on Consumer Contracts4 provides compelling evidence to suggest that consumers are not adequately protected by disclosure alone. This reflects our experience. Consumer purchasing decisions are subject to a large number of influences and biases which limits the ability of consumers to act “rationally”. For example:

the likelihood of a consumer walking away from a transaction decreases as a consumer moves closer to signing the contract meaning they are more willing to accept information—and so pay less attention to information—provided at a late stage of the transaction process.

consumers tend to use “rules of thumb” to deal with situations where there is too much information to evaluate or where there is choice overload. A key consequence is that consumers tend to focus on only a limited number of variables. Recent evidence obtained by Which? suggests this is a particular risk with lower value purchases as consumers are more likely to read the contractual small print as the value of the contract increases.

Value of purchase	% of consumers who always read all the terms and conditions
<£50	10%
£50-£500	20%
>£500	35%

consumers tend to “overvalue” a benefit that is received now and “underestimate” the impact of any deferred costs eg the opportunity to acquire a great value broadband package now would normally be expected to outweigh the risk of significant costs were that consumer to move home within the minimum term.

Consumers tend to underestimate their usage of goods that bring “pleasure” now but pain later eg a consumer is likely to overestimate their chances of staying within the inclusive call allowances of a well-priced monthly mobile phone package with high “out of package” call charges.

It is because traders can draft their contracts with this foresight (and consumers may often only realise the significance of a clause with hindsight) that these behavioural biases must be taken into account when deciding which terms are within the scope of the unfair terms legislation. Otherwise, some terms will remain “unchecked” by competition yet the regulator may remain powerless to intervene and address any consumer detriment that such terms may cause.

3. Recommended amendment to Clause 67

We believe Clause 67 of the draft Bill should be amended to read as follows:

1.A term of a consumer contract may not be assessed for fairness under section 65(1) to the extent that:

(a)it specifies the main subject matter of the contract, or

(b)the assessment is of the appropriateness of the price payable under the contract by comparison with the main goods, digital content or services provided under it.

2.Subsection (1) excludes a term from an assessment under section 65(1) only if it is transparent and prominent.

3.A term is transparent for the purposes of this Part if it is expressed in plain and intelligible language and (in the case of a written term) is legible.

4.A term is prominent for the purposes of this section if it is brought to the Consumer’s attention in such a way that an average consumer would be aware of the term and appreciate its significance.

5.In subsection (4) “average consumer” means a consumer who is reasonably well-informed, observant and circumspect.

6.In this Part “digital content” means data which are produced and supplied in digital form.

7. This section does not apply to a term of a contract listed in Part 1 of Schedule 2.

Annex B

PART 3: MISCELLANEOUS AND GENERAL (PRIVATE ACTIONS IN COMPETITION LAW)

Further Evidence in Relation to Issues Around Settlement and Costs

1. Overview

In the context of a commercial dispute, it will almost always be in the interests of the parties to reach an agreed settlement at an early stage. This is particularly true in today’s litigation landscape, where the cost of taking formal proceedings to trial can extend to many millions of pounds in complex cases. As we know from the private actions that are currently before the courts, follow-on damages claims for competition law infringements can be very complex. Consequently, they are often expensive to pursue.

For this reason (among others) Which? agrees with BIS and other stakeholders that efficient settlement should be at the heart of the new collective redress regime. Settlement must be achievable quickly and cost-effectively, in a manner that is fair to both claimants and defendants. We therefore support the introduction of a collective settlement regime in sections 49A and 49B of the Competition Act 1998 and endorse BIS’s approach of setting out the detail of that regime in the primary legislation. We believe this will generate clarity and certainty for litigants.

There is, however, one issue that is central to the effectiveness of any collective settlement regime which is not currently addressed in the draft Bill. That issue is the interaction between the collective settlement process and the costs rules that will be applied in the CAT. Costs rules are inextricably linked to settlement and a collective settlement regime will be effective in practice only if the costs consequences of the parties’ actions make fair and expeditious settlement a feasible option.

The costs rules that are of particular importance for settlement purposes are (i) the cost shifting principle and (ii) Part 36 of the Civil Procedure Rules, which the CAT proposes to adopt (in spirit if not the precise letter). We do not contend that these cost rules should be abandoned. Which? agrees that cost shifting and Part 36 costs consequences should apply in the context of collective proceedings; they rightly form part of the suite of safeguards that BIS has constructed against unmeritorious claims. Rather, our concern is that if these rules are applied wholesale to the collective settlement regime as currently proposed, the effect will be to skew the risk profile of collective proceedings and to discourage—rather than encourage—efficient and fair settlement of claims. In our view, the collective settlement process needs to be tailored to ensure that the application of these rules does not have unintended consequences that are detrimental to all parties as well as the CAT.

This note briefly explores the ways in which the costs rules drive the settlement process and thereby govern whether early settlement is likely to be achievable in practice. It then proposes an addition to the collective settlement regime to take the impact of the costs rules into account.

2. The Interaction between Costs and Settlement

The costs drivers behind settlement decisions

In considering how costs drive the parties’ approach to settlement, it is helpful to consider both claimants and defendants as rational economic agents seeking to maximise their utility. For defendants, utility is likely to be measured in monetary terms. Defendants will seek to minimise (i) their own costs (ii) any costs awarded against them and (iii) any damages payable. Claimants will also seek to minimise costs but will seek to maximise damages.

Representative bodies who act on behalf of a class may consider additional factors in calculating utility; for example, the desire to reach a fair deal for represented consumers or SMEs might override cost concerns that would prevail in a purely commercial context. Defendants, on the other hand, are less likely to place much weight on reputational considerations in cases of this kind. Those defendants that are primarily concerned with preserving their market reputation are more likely to have taken proactive measures, such as participating in a voluntary redress scheme.

In order to enjoy the benefits of cost shifting and minimise exposure to costs, a claimant must achieve an award of damages for a positive value; that is, a value greater than nil. While we cannot speak for other representatives who intend to use the new regime, Which? has no interest in bringing collective proceedings on behalf of consumers unless we can be confident that we will “win” in this basic sense.

Assuming, then, that a representative will usually achieve some degree of “win”, the cost shifting principle means that a defendant will bear both its own costs and a proportion of the representative’s costs. To minimise this risk, a rational defendant will be incentivised to make a settlement offer under Part 36 (or its equivalent under the new CAT Rules).

The effect of Part 36 is to require a claimant to pay a defendant’s costs if the claimant rejects a settlement offer from the defendant that is equal to or greater than the amount of damages the claimant ultimately receives after trial. In the case of an offer made by a claimant, the defendant must pay the claimant’s costs on an indemnity basis if the claimant is awarded damages greater than or equal to its own offer. Part 36 thus encourages parties to reject a settlement offer only where they are confident that the offer is well below (or, in the case of a claimant’s offer, well above) the level of damages that will ultimately be achieved.

Outside the context of collective redress, a claimant will assess the likelihood of beating a defendant’s offer and will make a commercial decision about whether to proceed to settlement on that basis. The cost shifting principle and Part 36 do their jobs well here; the parties are incentivised to behave reasonably and reach settlement at an early stage, reducing the burden on the parties and the courts. However, this process does not translate to collective proceedings, primarily due to the information asymmetry that exists between representatives and defendants.

Information asymmetry

Even where a representative can be confident of a “win”, they are unlikely to have any way of accurately predicting the size of that win and the precise quantum of damages that will ultimately be obtained. While the economic experts acting for the representative might be able to show that there was some level of overcharge in the retail market (perhaps using publicly available information) representatives will not be privy to the sales records of individual defendants or other data needed to more precisely assess the impact of an infringement on retail prices and volumes. This information will lie exclusively in the hands of the defendant(s).

The traditional answer to this kind of information asymmetry is disclosure of documents. Full scale disclosure serves this purpose well (subject to interlocutory debates about the scope of disclosure) and allows a representative’s economic experts to build a more accurate picture of the overcharge suffered by consumers. But disclosure generally comes late in the day. In the case of collective proceedings for competition law infringements, disclosure will take place after any jurisdiction challenges have been resolved and after the battle over certification has been fought. This will be many months (perhaps years) after the commencement of a claim.

One response might be to bring the disclosure process forward. However, as the private follow-on actions which are currently before the courts demonstrate, the process of disclosure will itself take many months with many thousands of documents being reviewed by both the defendants’ solicitors and economists (for the purpose of effecting disclosure) and the representative’s solicitors and economists (for the purpose of digesting the documents disclosed). Significant cost will inevitably follow. The difficulty, then, is that early and cost-efficient settlement is largely incompatible with the considerable cost and delay often associated with full disclosure in cases of this kind.

Part 36 and the rational litigant

In the absence of full disclosure, how will settlement discussions play out where information asymmetry persists? In the same way as in cases outside the collective redress context, a rational defendant will be incentivised to make a Part 36 settlement offer. But for what amount? The short answer is: for an unreasonably low amount.

The purpose and effect of a defendant’s Part 36 offer would usually be twofold:

i.to allow the defendant to feel comfortable that it will not be penalised in costs if a claimant rejects a “reasonable” offer; and

ii.to put pressure on a claimant to accept a “reasonable” offer by imposing a financial risk if the offer is rejected.

But where information asymmetry exists, only the defendant can assess with any degree of accuracy whether its offer is “reasonable”. A representative—acting not in its own commercial interests but in the interests of the represented class—has no way to correctly assess whether the offer represents a fair deal for the class.

In this scenario, a rational defendant will have every incentive to make an unreasonably low offer; that is, an offer well below the level of damages that the defendant believes the CAT will ultimately award. This might do little to achieve the first objective set out above (the defendant’s offer will provide little protection against an adverse costs award, as the representative is likely to beat the unreasonably low offer). However, an unreasonably low offer will still have the second effect outlined above—putting pressure on the representative to accept the offer—because the representative does not know whether the offer is reasonable or not. In this way, transposing Part 36 wholesale into the collective proceedings regime effectively stacks the system toward promotion of unreasonable offers. There is little for a defendant to lose by attempting to settle for an unreasonably low sum at an early stage.

The representative will then be faced with an objectionable choice. The representative must either accept a settlement offer on behalf of the represented class without knowing whether the offer is reasonable or not, or reject the offer and face the risk of paying the defendant’s costs if it turns out the offer was in fact reasonable.

It might be argued that, if representatives can assume that a rational defendant will always make an unreasonably low offer, then representatives should know to reject all opening offers, rendering the information asymmetry unproblematic. But this seems to run counter to the ultimate objective of promoting early and cost-efficient settlement. So what is the solution?

3. Proposal

Aim of the proposal

The answer to this problem is that the collective settlement regime must give the party who suffers from the information asymmetry (in this case, the representative) a means to be confident that a settlement offer is reasonable. This needs to be done without jeopardising the objective of reaching timely and cost-efficient settlement agreements. This will only be achieved by ensuring that the regime gives defendants an incentive, at an early stage, to make a reasonable settlement offer instead of an unreasonable one. The settlement process must be structured to ensure that the economically rational approach to settlement delivers a just and reasonable outcome—the result clearly envisaged in the draft Bill—right from the very first offer.

Content of the proposal

The above aim can be achieved by two straightforward additions to the collective settlement regime set out in the draft Bill, as follows:

First, specify that the party who makes an offer must demonstrate to the CAT that its terms are just and reasonable. The opposing party can make submissions on matters within its knowledge to assist the CAT in its assessment.

Second, if the CAT is not satisfied that an offer is just and reasonable, make it clear that the consequences of Part 36 do not apply to that offer. If the CAT cannot be sure that the offer is fair, then the party receiving the offer cannot be expected to be sure of this either, and should not suffer a costs penalty in such circumstances.

The requirement on a defendant to show that its offer is just and reasonable removes the incentive to make an unreasonably low offer. The representative can feel confident in accepting an offer, in the knowledge that if such offer does not represent a fair deal for the represented class this will be borne out before the CAT. Yet it also prevents a representative from being required to stand before the CAT and endorse an “agreed” settlement for approval, where the representative has no knowledge of whether the settlement terms are just and reasonable. Avoiding this kind of scenario is clearly in the interests of the representative, the represented class and the CAT.

Further, in cases where a representative is in a position to determine the level of overcharge in the relevant market prior to full disclosure (for whatever reason), and the representative makes a settlement offer which is accepted, the onus should be on the representative to show that the offer is just and reasonable. If the representative could not do so, Part 36 would not apply for the representative’s benefit.

In this way, the proposal does not benefit either representatives or defendants to the detriment of the other. Rather, it ensures that the risk profile of collective proceedings is not skewed by attaching beneficial costs consequences to unreasonable offers. This also furthers the objective of Part 36; reasonable offers should be accepted to avoid incurring unnecessary cost and delay, while unreasonable offers should have no effect on the parties’ positions.

4. Conclusions

The above proposal would ensure that the costs drivers which underpin the settlement process do not steer rational litigants away from early and efficient settlement. It gives rise to a logical, common-sense rule by which a party who makes an offer must show that it is fair and, if they cannot, no benefit is derived from the offer. Any other position is likely to render the collective settlement regime ineffective.

Given the level of detail in the draft Bill around the collective settlement process and the procedure for approaching the CAT with a settlement proposal, Which?’s view is that the above proposal should be implemented in the Bill itself.

Annex C

Part 3: Miscellaneous and General (Private Actions in Competition Law)

Further Evidence in Relation to Issues Around Certification

1. Overview

The draft Bill seeks to incorporate a new section 47B into the Competition Act 1998, setting out the process for certifying collective proceedings. Which? agrees that certification can act as a legitimate safeguard against unmeritorious claims, ensuring that opt-out actions are available only in appropriate cases.

However, it is equally important that the certification process does not act as a barrier to effective redress. If the certification requirements make it legally or financially unviable to bring collective proceedings, there is a risk that the regime will fall into disuse and the problems it was designed to address will go unresolved. The certification process must therefore be structured in a way that enhances efficiency and certainty, with minimal scope for generating unnecessary cost and delay in meritorious cases.

Which? is concerned that one aspect of the certification process in particular will generate considerable uncertainty and open the door to long-running and expensive interlocutory disputes. Our concern centres around the requirement that all claims included in collective proceedings must “raise the same, similar or related issues of fact or law” (new section 47B(6)).

It is, of course, necessary for a nexus to exist between individual claims which are brought together as part of collective proceedings, otherwise those proceedings would be unworkable (the “nexus requirement”). However, it is imperative that the nature of the nexus requirement is set out as clearly and unambiguously as possible. Ambiguity leads to uncertainty, which in turn leads to interlocutory disputes, delay, excessive cost and a reduced likelihood of early settlement. In particular:

The nexus requirement should not be framed with such generality that its content is entirely open to interpretation, leaving it vulnerable to being interpreted in ways that are unintended or unforeseen.

The resources of the CAT, the appellate courts and the parties must not be expended on many months (or indeed years) of debate, attempting to understand what the nexus requirement actually means.

Past experience clearly demonstrates that an ambiguous nexus requirement will undermine the success of a collective redress regime. This note draws on two examples to illustrate the point, before proposing an addition to the draft Bill to overcome any ambiguity in the nexus requirement contained in section 47B(6).

2. Examples of the Problems caused by Ambiguity

Emerald Supplies v British Airways Plc [2010] EWCA Civ 1284 (Court of Appeal)

In Emerald Supplies, two co-claimants brought an action against British Airways on behalf of all direct and indirect purchasers of air freight services who suffered loss due to an alleged price-fixing cartel in the air freight market. The claim was brought by way of a representative action under Rule 19.6 of the Civil Procedure Rules (CPR). Representative actions are arguably the closest living relatives to the opt-out regime envisaged in the draft Bill; the aim of both is to achieve collective redress without all possible claimants having to appear before the court. Representative actions are not limited to cases relating to competition law infringements, but Emerald Supplies was a case of that kind.

The nexus requirement under CPR 19.6 stipulates that the representative and all represented parties must share “the same interest” in the claim. The court in Emerald Supplies interpreted this requirement so strictly and narrowly that it is now almost impossible to conceive of a case in which a representative action would be both available and necessary. The court found that:

Liability would first have to be established against the defendant in order to determine whether any of its customers were entitled to damages, and thus whether any customers had the same interest as other customers in an entitlement to damages. This perceived inability to define the class prior to liability being established was held to scupper any argument that the customers had the “same interest” in the claim.

If a defendant could raise different defences against different class members, then those class members would not have the same interest in the claim. On the facts of Emerald Supplies, the passing on defence would be available against some of the class members but not others. Thus, for this reason also, the nexus requirement was not met.

The decision in Emerald Supplies is considered to significantly curtail any future use of CPR 19.6, at least in the context of redress for competition law infringements. The Court of Appeal itself described the claim in Emerald Supplies as an “attempt at keeping a procedural novelty alive”. It would be in no-one’s interests if the new collective redress regime was also seen in this light.

Although the nexus requirement in CPR 19.6 is couched more narrowly than the nexus requirement in the draft Bill, defendants will inevitably argue that both requirements are intended to produce the same result and should be interpreted in the same way. It is hoped that the CAT will be willing to depart from the Court of Appeal’s analysis and reject this argument. It is also hoped that such rejection would be upheld on appeal (and subsequent appeal). But there is a risk that this will not be the case and that the new regime will suffer the same burdensome interpretation as CPR 19.6.

Regardless of which approach is eventually adopted, considerable cost, delay and uncertainty will be incurred by all parties in having the debate. As a partner at one leading defendant law firm recently stated (during a presentation at a Law Society seminar), the experience of Emerald Supplies “shows that the definition of the class will be strongly contested”. This is not—and should not be—the intended fate of the new regime.

Wal-Mart Stores Inc v Dukes 131 S. Ct. 2541 (2011) (US Supreme Court)

The second example is drawn from the well-established class action regime in the US. Collective proceedings in the UK can (and hopefully will) depart from the US experience in a number of ways. But that does not mean that the UK should ignore the lessons learnt in other jurisdictions. Rather the UK should leverage off those lessons, to ensure that any foreseeable pitfalls are avoided.

In Wal-Mart Stores, an employee brought a class action against Wal-Mart for discriminatory employment practices. She purported to bring the action on behalf of all female employees of the company and sought to have a class certified on that basis. Under the relevant procedural rules, a class could be certified only if the court identified “questions of law or fact common to” the class. There are obvious parallels between a nexus requirement based on “common” questions of fact or law and a nexus requirement based on “same, similar or related” issues of fact or law.

The claim in Wal-Mart Stores failed at the certification stage, largely due to the absence of a common question among the class members. The majority of the Supreme Court described the nexus requirement as being the crux of the case. For present purposes, there are two key lessons emerging from Wal-Mart Stores.

The first is an appreciation of the monumental cost and delay incurred in adjudicating the nexus point. The motion for class certification was first filed on 28 April 2003. The Supreme Court handed down its judgment, which considered nothing other than certification, on 20 June 2011. The parties were embroiled in interlocutory litigation about the meaning of the nexus requirement for over eight years.

While there are features of the UK court system that differentiate it from the US, it must be kept in mind that the US courts are highly experienced in grappling with the issues thrown up by a collective redress regime. There is a real risk that the UK courts will not be significantly quicker in determining issues around certification, at least not in the formative years of the new regime. This demonstrates the acute importance of ensuring that the nexus requirement is clear if collective proceedings are to proceed efficiently and retain credibility.

The time spent debating the nexus requirement in Wal-Mart Stores was prolonged by another interpretation issue. There has been considerable debate in the US courts as to whether the underlying merits of a collective action should be assessed in the course of determining whether common questions of fact or law arise. The Supreme Court determined that the merits of the claim should be considered, and held that “significant proof” of the common question(s) of law or fact is required. The plaintiff class in Wal-Mart Stores adduced considerable evidence in pursuit of this requirement, including statistical evidence, factual witness evidence of class members (120 separate affidavits) and even an expert report. Wal-Mart adduced similar evidence in reply.

This approach has the effect of turning what should be an interlocutory issue into a mini-hearing of the substantive case, muddying and prolonging the certification process and again increasing costs for all parties. But cost and delay are not the only shortcomings here.

This also provides an example of how an ambiguous nexus requirement is open to various possible interpretations, some of which may depart significantly from the meaning or scope that was originally intended. The US class action regime is one of the most well-established and well-understood in the world. Arguments that have held sway before the highest US courts will inevitably be repeated within the UK framework.

3. Proposals to Ensure the Nexus Requirement is Workable

The examples above demonstrate just some of the ways in which an ambiguous nexus requirement can skew the certification process, often with unforeseen consequences. How will the proposed nexus requirement in the draft Bill operate in practice? Objectively, all consumers are affected in the same way by a competition law infringement. In the context of a cartel, consumers all pay a higher price for the cartelised product. The issues they want resolved are also the same; they want to know how much redress is payable and by whom. There should be no difficulty for an authorised representative to show that consumer claims for competition law infringements are appropriate candidates for opt-out collective actions. The problem is that by couching the nexus requirement in unclear terms, the door is left open for extensive debate about precisely what the requirement means and how it applies, including to consumer claims. The position is uncertain and unpredictable.

The most effective way of removing this uncertainty would be to remove the nexus requirement altogether. The draft Bill includes a provision requiring the CAT to determine whether opt-out collective proceedings are “suitable” on a case-by-case basis. If a sufficient nexus between the class members’ claims is lacking, this would be addressed by the CAT at the point of considering suitability. An independent nexus requirement arguably adds an unnecessary further hurdle that merely confuses matters.

If there remains an appetite for an independent nexus requirement, then the lessons of Emerald Supplies and Wal-Mart Stores suggest that the draft Bill needs to be more explicit as to the meaning and application of that requirement. In our view, this would best be achieved by clarifying that all end consumers of a product, where the price of that product has been affected by an infringement of competition law, are affected by the infringement in the same way, such that their claims raise the same, similar or related issues of fact and law.

This addition to the draft Bill would generate a number of benefits for a variety of stakeholders. In particular:

It would give statutory effect to the intended interpretation of the nexus requirement in the consumer context.

It would limit the risk of disproportionate and unworkable criteria being read into the nexus requirement, as we saw in Wal-Mart Stores (with the requirement for “significant proof” at the interlocutory stage) and Emerald Supplies (with the restrictive reading of CPR 19.6 rendering it largely redundant).

It would avoid the lengthy and costly interlocutory disputes that will inevitably be seen in the absence of such clarification.

Finally, it would close the door to unscrupulous behaviour by any defendants who wish to elongate the interlocutory stages of proceedings merely to delay the moment at which compensating their victims becomes inevitable.